Mining shares could be turning cheaper: Here’s why

Posted: 20 January 2023 4:00 pm
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Shares in top miners have climbed 15–30% over the past 2 months but some are still considered undervalued.

Investors in Australian miners have endured a roller-coaster period over the past 12 months as high commodities prices have battled with the impact of rising interest rates.

But particularly over the past 2–3 months, share prices for mining giants such as BHP (ASX: BHP), Rio Tinto (ASX: RIO), Fortescue Metals Group (ASX: FMG) and Newcrest (ASX: NCM) have clambered upwards, surging 15–30% higher on the ASX.

Despite this push, some analysts believe these shares could be getting cheaper because earnings are expected to be higher for longer. Here’s why.

Why miners are the big winners from China’s reopening

While miners benefited from sky-high commodities prices in 2022, there was always an overhang of a looming slowdown that limited gains.

For example, the price of iron ore peaked at around US$160 per tonne in early 2022 but slid down to around US$86 per tonne in November amid fears of slowing demand.

The threat of a global slowdown remains in 2023, but the situation has drastically changed over the past month with the sudden reversal in China’s zero-COVID policy.

Beijing last month dumped its harsh pandemic restrictions that had slowed growth in the world’s second-largest economy. The government is now trying to jump-start activity by providing stimulus to key sectors.

“China will be a stabilising force when it comes to commodity demand in the 2023 calendar year, with OECD nations experiencing economic headwinds,” BHP chief executive Mike Henry said this week after unveiling higher-than-expected quarterly iron ore shipments.

BHP joined rival Rio Tinto in expecting that China’s measures to support its property sector will underpin solid demand for the steel-making raw material. Iron ore prices have climbed back to US$120 per tonne.

Coal producers similarly see improving demand from the world’s top commodities market. Australia’s first coal shipments to China in 2 years are expected to arrive next month amid improving diplomatic ties between the 2 countries.

Cheaper valuations

Improving prices and demand is likely to prompt analysts to revise upwards their earnings estimates for these companies. Some have already done that.

Morningstar analysts this week lifted their fair value estimates for BHP (up 10%), Rio (up 8%), Vale (up 19%), Fortescue (up 20%) and Glencore (up 8%) after updating its iron ore price assumptions.

They also listed gold miner Newcrest as the cheapest on their coverage list, trading at a 27% discount to its $31 per share fair value estimate.

“Expectations of increased demand for commodities arising from further stimulus and government financial support for China’s property sector more than offset headwinds as central banks kept raising interest rates to dampen inflation,” mining analyst Jon Mills said in a note.

He now expected iron ore to average US$110 per tonne from 2023 to 2025, up from around US$85 previously, with miners benefitting from expectations of improved economic growth and higher steel production in China as the country reopens.

Thermal coal will similarly remain elevated amid supply issues due to the Russia-Ukraine war, with prices likely to average US$270 a tonne from 2023 to 2025, up from about US$250 previously.

While Mills has retained fair value estimates of $12 a share and $8 a share respectively for coal miners Whitehaven and New Hope, he said Whitehaven is the joint cheapest on his list, trading at a 27% discount.

Gold prices are set to trend higher in the near term despite a stronger Australian dollar, with the precious metal now set to average US$1,810 per ounce from 2023 to 2025 based on the futures curve, up from around US$1,710 previously. That reinforces the undervaluation for sector leader Newcrest.

Considering buying mining shares?

If you are keen to buy shares in BHP, Rio Tinto, Fortescue or Newcrest shares, you can invest through an online share trading platform that supports buying ASX stocks.

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