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BMO Downgrades Rio Tinto on Expected Pullback in Iron Ore Prices

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Jun. 28 2019, Published 9:04 a.m. ET

Iron ore prices soaring in 2019

Iron ore prices are soaring in 2019 due to the combination of tighter supply and firm Chinese steel demand. The first major supply disruption for the iron ore market came after Vale’s (VALE) dam burst in Brazil on January 25. This took a significant chunk of its capacity offline. Afterward, BHP Billiton (BHP) and Rio Tinto (RIO) flagged weather-related disruptions. BHP Billiton (BHP) is expecting a reduction of 6 million–8 million tons of iron ore for fiscal 2019 while Rio has downgraded its production guidance twice so far this year. You can read Rio Tinto’s Production Cut Could Propel Iron Ore Prices for more on this. While iron ore prices have remained strong in 2019 thus far, BMO Capital Markets thinks that is about to change.

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BMO downgrades Rio Tinto

As reported by Barron’s, BMO Capital Markets downgraded Rio Tinto (RIO) yesterday as it believes that an expected pullback in iron ore prices will impact the miner’s stock price. BMO’s analyst, Edward Sterck, notes that “iron ore price is well above levels needed to incentivise the [roughly 60 million tons] of swing production needed to balance the market.” While Sterck downgraded Rio from “outperform” to “market perform,” he maintained the target price for Rio’s stock at ~$54.

BMO likes Rio better than BHP

However, the analyst likes Rio better than BHP as long as geopolitical tensions don’t drive a breakout in oil and gas prices. Since BHP has exposure to oil and gas, a breakout in prices would drive BHP’s earnings higher.

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