ASX mining stocks may be surging ahead, but UBS thinks some have run ahead of fundamentals and have downgraded the stocks.
The S&P/ASX 200 Index (Index:^AXJO) dipped 0.4% during lunch time trade although ASX miners are bucking the trend as another surge in the iron ore price boosted the sector.
The Fortescue Metals Group Limited (ASX: FMG) jumped 2.1% to a new record high of $22.98. The BHP Group Ltd (ASX: BHP) share price and Rio Tinto Limited (ASX: RIO) share price aren't far behind with gains of over 1% each.
There're reasons to think that ASX iron ore miners can build on gains as the iron ore market is likely to stay tight through 2021.
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Downgraded after big run
But the same can't be said for some base metal miners after their big share price rally.
"Optimism toward a global economic recovery in 2021 and rising EV [electric vehicle] penetration have driven very strong share price performance for our industrial metals coverage," said UBS.
"While we remain positive on the commodity price outlook, strategic position, project execution and operating performance, we think in many cases these factors are now priced in."
Worries about overstretched valuations prompted the broker to cut its recommendation on three outperforming ASX miners to "neutral" from "buy".
Three ASX stocks cut to "neutral"
The OZ Minerals Limited (ASX: OZL) share price is one of the three as it's trading at a more than 10-year high of $19.
Another is the Lynas Rare Earths Ltd (ASX: LYC) share price as it's gained around 70% since the start of calendar 2020.
The third downgrader is the Sandfire Resources Ltd (ASX: SFR) share price. UBS noted that the stock has rerated strongly following the final investment decision at T3. Like the other two stocks, the SFR share price is trading inline with the broker's valuation and the risk-reward is balanced.
Top ASX base metal mining stock to buy
But this doesn't mean there aren't buying opportunities in the sector. The IGO Ltd (ASX: IGO) share price is UBS' top mining pick even as shares in the nickel and lithium miner surged 23.8% to $6.29 in afternoon trade.
"IGO is trading at the largest discount to our NPV in our industrial metals coverage and is our top pick," added the broker.
"The strategic move to buy into Greenbushes lithium and sell Tropicana might drive renewed interest in its exposure to electric vehicles."
ASX gold miners on the "buy" list
UBS' other key picks in the sector are gold miners. Importantly, these ASX gold miners offer production growth, quality assets and strong free cash flows.
The gold stocks the broker is urging you to buy are the SSR Mining Inc CDI (ASX: SSR) share price, Newcrest Mining Ltd (ASX: NCM) share price and Saracen Mineral Holdings Limited (ASX: SAR) share price.
