Brokers still see value in iron ore miners despite China concerns
Brokers said today they still see value in iron ore stocks after the latest round of production updates from the major miners.
BHP Billiton (LON:BLT) and Rio Tinto (LON:RIO) posted their quarterly figures over the last two days and both reiterated their commitment to heavy investment in their iron ore arms despite concerns over slowing growth in China.
In May BHP received final environmental approval for a US$20 bln investment at its Western Australian iron ore project, which would double capacity from 2014.
Its current iron ore investment programme is worth some U$S9 bln.
Rio Tinto meanwhile has earmarked US$4.2 bln to develop its iron ore business.
China's steel makers are huge users of iron ore but the mixed economic signals coming out of the country have seen the price benchmark of 62 per cent grade iron ore drop to US$129.4 a tonne from US$180 a year ago.
Demand for steel is driven by economic activity with the construction industry, car industry and white goods and general appliance makers all major users.
BHP Billiton, the world's third biggest iron ore miner, behind Brazil's Vale (NYSE:VALE) and Rio Tinto today shrugged off what it described as a "challenging environment" by posting record numbers of iron ore shipments for the twelfth year in a row.
It increased shipments by 15 per cent in the final quarter, ended June, from the same period last year.
Numis analyst Cailey Barker said: "Overall, a solid update seeing BHP do what it does well despite the over-arching macro concerns."
Although the firms' production report did not allude to the iron-ore price environment going forward, it said it does expect to increase iron ore output by five per cent in 2013.
Barker added that BHP still has faith in the "tier 1" nature of its iron ore operations despite a cyclical downturn in demand from China as it continues to make investments.
Meanwhile its rival Rio Tinto posted flat iron ore production for its second quarter and lower than expected growth in the number of shipments.
Shipments in the first half of its financial year grew four per cent from the same period a year ago.
Myles Allsop, an analyst at UBS, said: "Lower iron ore shipments in the quarter reduce our underlying earnings estimate for 2012, more than offset by the inclusion of a US$230mln gain on sale of Kalahari Minerals and Extract to be recorded in Energy division earnings in this year's first half."
The broker has a ‘buy' stance on the stock but trimmed its target price to 4750 pence from 4800 pence.
Analyst Liam Fitzpatrick said: "We continue to see value and re-rating catalysts, although we expect uncertainty over guidance and iron ore prices to weigh on the shares in the near term."
He added the catalysts include installation of a second plant and grinding capacity in the first half of 2013 and the Isua project in Greenland permitting process in the second half of this year.
The broker maintained an ‘outperform' rating on the stock but cut the target price to 430 pence from 470 pence.
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