Analysts Hike Valuations on UK-Listed Miners

BHP Billiton and Rio Tinto are both undervalued at current levels, says Morningstar equit analyst Mark Taylor

Mark Taylor 19 March, 2015 | 2:00PM
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For most miners, the period of runaway cost inflation is over. Cheaper oil, weaker producer-country currencies and industry-specific deflation point to lower operating and capital costs in 2015 and beyond. The lower cost curve and plentiful supply are also forces for lower prices. We've updated mid-cycle price estimates after revisiting long-term outlooks for a range of commodities. Our revised mid-cycle price for Brent oil is $75 per barrel (down from $100) while our revised mid-cycle price for US natural gas is $4 per thousand cubic feet, down from $5.40 per mcf (all in 2018 dollars). We also reduce mid-cycle prices for iron ore by 15% to $65 per tonne, metallurgical coal by 12% to $117 per tonne, copper by 2% to $2.45 per pound, aluminium by 25% to $0.85 per pound and nickel by 33% to $6.00 per pound, among others.

For Australian holders of BHP Billiton (BLT) and Rio Tinto (RIO) shares, the negatives are substantially offset by a reduction in the Australian dollar/US dollar exchange rate to 0.76; lower assumed operating costs courtesy of lower energy prices, labour costs and other key operating and capital inputs; and a focus on other cost-outs.

BHP Billiton – Hiking Valuation on UK Shares

BHP CEO Andrew Mackenzie has said the firm is reducing costs and improving productivity across the group faster than originally planned. Our Australian dollar fair value estimate remains AUD 40 per share, but our valuation declines 15% in US dollar terms to $30 and in British pounds rises to 2,365 pence per share (from 2,175p).

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
BHP Group PLC2,058.50 GBP0.00Rating
Rio Tinto PLC4,592.50 GBP0.00Rating

About Author

Mark Taylor  is an equity analyst at Morningstar.