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Inside Iron Ore Miners’ Price Targets: Gauging Their Upside Potential

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Factors impacting analyst sentiment

Although iron ore prices rose 18% in 1Q17 compared to 4Q16, they started falling toward the end of March 2017. After hitting a 30-month high of ~$95 per ton in February, iron ore prices settled at ~$80 per ton to end the quarter.

Investors should note that even at the current level of iron ore prices, companies are earning attractive margins. As a result, most of the mid-tier miners should be able to stay afloat. The concern is not that a correction has taken place in the last few weeks, but that prices could weaken further. This trend could put pressure on cash flows for miners going forward.

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BHP and Rio Tinto

Among the iron ore miners (PICK), analysts are most bullish on Rio Tinto (RIO), with 63% “buy” and 19% “hold” ratings. One year earlier, 50% of these analysts were recommending a “buy” for the stock. Along with higher commodity prices, a reduction in its debt and robust cash flow encouraged analysts to turn positive on the stock. Its target price has also seen an upward revision of 44%.

BHP Billiton (BHP) comes in second, with 38% of the 21 analysts recommending a “buy.” One year ago, 48% of the analysts recommended a “buy” for the stock. Its target price has also seen an upward revision of 34% in the last year. However, this revision is lower than that seen by Rio Tinto stock.

While BHP’s target price implies an upward potential of 15%, Rio Tinto’s target price implies a 19% upside.

Vale SA and CLF

The analyst ratings for Vale SA (VALE) are tilted toward “hold,” with 57% of analysts making that recommendation. Out of 24 analysts covering VALE, 30% have a “buy” rating on the stock. In November 2016, only 15% of the analysts rated Vale as a “buy.” We’ll look at the reason for these upgrades in the next part of this series.

Cliffs Natural Resources (CLF) has 22% ratings each for “buy” and “hold.” Its target price implies an upside of 7.4% at the current market price of $8.61. One year ago, CLF stock didn’t have a single “buy” rating.

For an in-depth review of iron ore miners’ ratings, please read Iron Ore Surge: How Are Analysts Rating the Miners?

In the next article, we’ll take a close look at the reasons for analysts’ recent revisions in 1Q17.

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