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ASX iron ore miners jump on broker upgrades

miners in front of mining truck
Credit: iStock

Shares in the major ASX iron ore miners are jumping this morning after brokers upgraded their forecasts for the commodity.

The Rio Tinto Limited (ASX: RIO) share price rallied 1.8% to $103.80, BHP Group Ltd (ASX: BHP) share price added 1.3% to $40.36 and the Fortescue Metals Group Limited (ASX: FMG) gained 1.2% to $18.72 at the time of writing.

In contrast, the S&P/ASX 200 Index (Index:^AXJO) jumped 0.7% as the profit reporting season started a little better than expected.

Iron ore forecasts upgrade

The outperformance of the iron ore miners today comes on the back of an ever-brightening outlook for iron ore.

Bank of America (BoA) upgraded its forecast for the steel-making ingredient through to 2024, reported the Australian Financial Review.

The bank lifted its calendar 2020 estimates to US$96.70 a tonne from US$86 and its 2021 forecast to US$85 from US$71.30.

BoA’s forecast was also increased to US$75 from US$65 in 2022, while its estimates for 2023 and 2024 were revised up to US$71.70 (from US$65.10) and US$68.50 (from US$65.10), respectively.

The price of the ore is currently trading around US$118 a tonne.

What’s driving iron ore upgrade

The two key reasons for the more bullish outlook. The drop in production at Brazilian miner Vale SA due to COVID-19 and robust demand for steel in China.

Meanwhile, JP Morgan turned even more bullish on the commodity as it upgraded its 2021 forecast by 19% to US$100 a tonne. It also upped its 2022 estimates by 10% to US$86.

The broker’s initial worries that the iron ore price will ease as Vale overcomes its production issues have been put aside.

Demand outpacing supply increase

The miner managed to increase output to around one million tonnes a day but JP Morgan thinks this is as good as it will get for the next 12 months.

“The Vale recovery was previously seen as a catalyst to see iron ore prices trade lower,” said the broker.

“However, with the production now back in the market, and iron ore continuing to rally.

“We are now starting to think prices could remain well above cost curve support levels until Simandou comes to market, which could be 5-7yrs away.”

Valuation upgrades for ASX miners

This led to valuation upgrades for the three big ASX miners, although the broker thinks BHP and RIO represents better value than Fortescue.

The FMG share price outperformed with around a 70% jump since the start of the calendar year while the BHP share price and RIO share price are largely flat.

JP Morgan is recommending BHP and RIO as “overweight” (or buy) with a price target of $43 and $120 a share, respectively.

Fortescue is rated “neutral” with a price target of $18.60 a share.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. Connect with me on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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