These 3 global miners are too pricey, says Morningstar
Though some mining stocks have been upgraded on the back of higher commodity prices, these no-moat stocks remain overvalued, according to Morningstar equity analysts.
Mining major BHP Billiton (ASX: BHP) ranks alongside global competitors Anglo American, Glencore, Rio Tinto (ASX: RIO), Teck Resources, and Vale in trading at an average 38 per cent premium to our fair value estimates.
Of the major miners, Vale is now the most expensive given its exposure to higher-grade iron ore, which is enjoying premium pricing.
BHP, at a 13 per cent premium to our fair value estimate, is the least expensive of the major miners, reflecting oil exposure where we are relatively more optimistic and less exposure to iron ore relative to Rio Tinto and Vale.
All these mining firms are rated no-moat. We raise our fair value estimate for Rio Tinto plc by 4 per cent to AUD$25 a share, reflecting higher near-term iron ore prices. For Vale, it increases 6 per cent to US$9.40 per share with higher near-term iron ore prices and pellet premiums.
Our Anglo American valuation is up 3 per cent, with increased near-term coal prices and a higher spot palladium price, partly offset by a lower spot platinum price. Our valuation for Glencore falls 4 per cent to £2.40 per share with higher near-term coal prices outweighed by average declines in the spot prices of nickel, zinc, lead, and cobalt of 13 per cent. Our BHP fair value estimate is unchanged at £13.80 per share.
The bulk-focused miners have generally withstood recent market volatility so far, most posting share price gains since the end of June thanks to strong underlying prices for iron ore and coal. Vale has been a stand out, up 20 per cent since the end of June, reflecting the continued strength of the iron ore price and elevated premiums for high-grade ores and pellets.
Base metals-focused miners Glencore and Teck are down 11 per cent and 5 per cent, respectively, since the end of June with weakness in the price of zinc, lead, nickel, copper, and cobalt weighing.
We now think Vale is the most expensive of the large miners, trading at a 59 per cent premium to our US$9.40 per share fair value estimate. The overvaluation reflects Vale’s high exposure to iron ore and bloated premiums for high-grade ore and pellets, which we think are unlikely to last once steel margins in China normalise. We are most bearish on iron ore as we expect China to reduce its steel consumption and for a growing amount of steel to be made from scrap.
BHP plc is the least expensive of the large miners. We think BHP is less expensive given a smaller exposure to iron ore, and the addition of oil to the portfolio where we are relatively more optimistic on the outlook. The Australian-listed shares of BHP and Rio Tinto continue to trade at substantial premiums.
The changes to our fair value estimates for large diversified miners have been relatively small, averaging a 1.6 per cent rise.
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Mat Hodge is a senior Morningstar equity analyst, covering the resources sector.
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