The ASX miners with the biggest valuation upside to record iron ore prices

ASX mining shares may be struggling to make gains today but some of them may get a big valuation upgrade if the iron ore price stays around current levels.

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ASX mining shares may be struggling to make gains today but some of them may get a big valuation upgrade if the iron ore price stays around current levels.

Many of the sector’s heavyweights like the BHP Group Ltd (ASX: BHP) share price are slumping with the S&P/ASX 200 Index (Index:^AXJO).

But this could be a buying opportunity despite history showing that the month of May tends to be a weak period for shares.

Bullish outlook for the iron ore price

This is particularly true if the iron ore price stays above US$200 a tonne. There are more tailwinds than headwinds on the immediate horizon, so the commodity could continue to enjoy good support.

The analysts at Macquarie Group Ltd (ASX: MQG) looked at weekly shipping data from key Western Australian, Canadian and Brazilian ports.

What they found will put a smile on ASX investors’ faces as rival Brazilian miner Vale SA is struggling with exports.

Australia beating Brazil

“Vale saw shipments decrease WoW to 4.3mt on reduction in both the Northern and Southern Systems,” said the broker.

“Vale needs to produce at an average of >6.0mt per week to achieve its 315-335mt CY21 guidance provided. Vale produced 68mt of iron ore in 1QCY21.”

In the meantime, total shipments from Australian miners increased 6% week-on-week (WoW).

“In Australian Dollar terms, iron ore prices are nearing A$300/t (currently ~A$292/t),” added Macquarie.

“Strong steel production and steel margins continue to lift the iron ore price, with the market clearly in deficit this quarter.”

Big upgrades could be in the wings for ASX miners

The question is whether the iron ore price can hold on to gains. If it can till end of this year, the commodity will be 74% above the price Macquarie is using to value ASX mining shares.

If the lofty price persists into 2022, the price of the steel making mineral will be a whopping 148% above the broker’s current estimates.

This is starting to sound like Treasury’s ultra conservative estimate of US$55 a tonne from the previous federal budget!

ASX mining shares with the biggest upside to spot price

The logical follow-on question is which ASX mining shares stand to gain the most from the high iron ore price.

On that front, the Champion Iron Ltd (ASX: CIA) share price takes the crown. The broker noted that the valuation for the miner will jump by 450% if spot prices hold. Its current 12-month price target on the Champion Iron share price is $8 a share, but that’s based on its more conservative iron ore price forecast.

Second is the Fortescue Metals Group Limited (ASX: FMG) share price. Valuation for the group will be boosted by 395%. This compares to Macquarie’s price target of $23 a share.

In third spot is the Rio Tinto Limited (ASX: RIO) share price as its fair value will jump by 270%. The broker has a $140 price target on the Rio Tinto share price.

Macquarie has an “outperform” recommendation on all three.

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

The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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