Mining Sector Still Overvalued, say Analysts

Higher-than-expected prices for iron ore and coking coal have boosted valuations for FTSE 100 miners like Anglo American and Glencore

Mathew Hodge 16 April, 2019 | 3:39PM

Mining commodities

Steel-making materials stocks, those exposed to iron ore and coking coal, have markedly outperformed our near-term expectations. The key reasons have been continued strong steel demand growth, particularly in China, and more recently, Vale’s tragic dam failure in Brazil and Cyclone Veronica in Australia. Iron ore supply losses this year are material, about 6% of global iron ore supply and some of that will bleed into 2020. Coking coal supply has also been impacted in the near term by increased safety inspections, closures and environmental regulation in China. Thermal coal supply has been added and was not as impacted by inspections.

Overall, we see the mining sector as overvalued. Our global miners trade on an unweighted average 21% premium to our fair value estimates. We see the iron ore and coking coal exposed stocks as most overvalued. Rio Tinto (RIO) trades at a 46% premium to our fair value estimate, Anglo American 38% (AAL), and BHP (BLT) a 27% premium. The base metals miners are generally less overvalued. Current iron ore and coking coal prices are elevated by what we think are short-term supply disruptions and current demand drivers are unlikely to persist. The rational oligopoly argument for iron ore is unlikely to hold up, particularly if high prices persist.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Anglo American PLC1,984.40 GBX1.69
BHP Group Ltd36.00 AUD-1.32
Glencore PLC167.48 GBX1.47
Rio Tinto PLC4,578.00 GBX0.69

About Author

Mathew Hodge  is an equity analyst for Morningstar

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