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Are Miners Looking Cheap? J.P. Morgan Thinks So, Upgrades Rio Tinto


Sep. 10 2018, Published 11:08 a.m. ET

JPM upgrades Rio Tinto

Today, J.P. Morgan (JPM) upgraded Rio Tinto (RIO), believing that demand from China (FXI) should pick up over the coming months. It also believes that miners’ valuations are cheap compared to the same stages of previous cycles.

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China’s commodity demand to rebound

As Proactive Investors reported, JPM upgraded Rio to “overweight,” arguing that the sector (XME) as a whole is looking “cheap” right now. It estimates that China’s infrastructure boost could result in ~1.3 million tons of new copper demand in H2 2018. It also expects China’s seaborne iron ore demand to pick up as its steel production accelerates, supported by capacity shutdowns from November to March.

Valuations looking cheaper

Apart from a resurgence expected in Chinese commodity demand, JPM believes UK miners are trading at “depressed mid-cycle or recession multiples” despite the apparent current upswing. Analysts at JPM believe we’re 80% through this cycle. They add, “Mining equities are cheap vs multiples at comparable phases of previous economic cycles and would trade close to mid-cycle multiples even if current commodity prices fell -10%, indicative of valuation support.”

JPM feels that Rio Tinto is cheaper than most other miners. It’s trading at a 15% discount to BHP (BHP). Of the 14 analysts covering Rio Tinto (RIO) stock, 57% recommend a “buy,” 29% recommend a “hold,” and 14% recommend a “sell.” A year ago, 80% of analysts recommended a “buy.” Analysts had most likely turned away from the stock due to the lack of any significant catalysts. Of the analysts covering BHP Billiton (BHP), Cleveland-Cliffs (CLF), and Vale (VALE), 53.0%, 73%, and 73.0% recommend a “buy,” respectively.

While JPM is mostly optimistic about the sector, it downgraded Glencore (GLNCY) since some of its subsidiaries are alleged to have paid bribes to government officials to win or retain business.

Check out Which Stocks Do Analysts Love amid iron Ore Price Volatility? For a detailed analysis of analysts’ iron ore miner ratings.


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