Ord Minnett recently raised its base-case iron ore price forecasts, with our 2017 and 2018 forecasts upgraded to $US82 and US$65 a tonne, respectively, from US$73 and US$57, due to more constructive China steel demand estimates.
These new China steel demand changes have driven earnings upgrades of 13–17%, along with significant improvements in balance sheets for the major producers.
These latest changes see reiterate our positive view on the iron ore sector, with the large miners in the best financial shape we’ve seen in years and we examine these stocks in more detail below.
Within the sector, Fortescue Metals (FMG, Accumulate) sports high free cash flow generation and is the stand-out stock in the sector. In our view, the stocks continues to offer the most compelling investment case among the large miners. The company’s balance sheet is strong, and we expect a material uplift in its dividends in the near term, while we don’t expect the company to waste capital on large-scale M&A.
Meanwhile, the balance sheet of Rio Tinto (RIO, Accumulate) should be ungeared in a year. Our earnings estimates have risen 11% and 17% for CY17 and CY18, respectively. Rio Tinto will generate excess cash for the foreseeable future. On this basis, we continue to expect the company’s US$0.5 billion buyback to be topped up progressively over the medium term, along with higher dividends.
Finally, BHP Billiton (BHP, Hold) is in good shape, but its attraction is just slightly less compelling than Rio Tinto. Our BHP earnings estimates have risen 6% and 15% in FY17 and FY18, respectively. Rio Tinto looks a little more attractive, but in isolation BHP’s metrics are still reasonable.