Monsters of Rock: Blue chip iron ore stocks breathe in higher prices as bankers upgrade price targets

Goldman Sachs lifts price targets on a string of blue chips including BHP, RIO and FMG
Comes after its commodity team lifted 2024 iron ore price forecast by 22% to US$110/t
Materials up almost 2.5% as US Inflation

Goldman Sachs has followed its bullish call on iron ore prices, ramping up 2024 forecasts by 22%b to US$110/t, by lifting price targets on a suite of Australia’s largest mining companies.

The investment bank’s Aussie analysts Paul Young and Caleb Heiner have responded to GS’ larger commodity call by ratcheting up its price targets across the top bulk stocks.

Its buys Rio Tinto (ASX:RIO), BHP (ASX:BHP) and Champion Iron (ASX:CIA) have seen their price targets lifted from $126.50, $46.50 and $7.20 a share respectively to $136.10, $49.90 and $8.30 a share.

Fortescue (ASX:FMG) remains a sell for Goldman on valuation, but its price target has been lifted from $16.30 to $18.10 with realisations for its lower grade iron ore also expected to remain stronger over the short term.

MinRes (ASX:MIN) meanwhile has seen its price target cut from $51 to $49 and remains a sell, but that is heavily due to lower lithium prices.

Goldman Sachs are seeing a 40Mt deficit in the iron ore market in 2023, with a balanced market rather than a surplus seen in 2024 on the basis of lower than expected supply out of Australia and Brazil.

“Also of note is iron ore inventories in China remain low, with stocks at steel mills at just 16 days currently (vs. a 24 day 5-year average) and port stocks are at 5-year lows, before expected seasonal restocking ahead of the Chinese New Year in early/mid Feb 2024,” Young and Heiner said in a note yesterday.

Will lower or higher grade win out?

In the short term lower grade iron ore is expected to continue to fetch prices close to 62% Fe benchmark fines, thanks to weak margins for China’s steelmakers, who are feeling the pinch from the high price of raw materials like iron ore and met coal.

“Our view of a balanced iron ore market, ongoing low Chinese steel mill margins, and relatively subdued DM steel demand and prices in 2024 means that low grade 58% Fe should continue to outperform high grade 65%/lump/pellets over the near term due to the steel industry’s ongoing focus on reducing costs,” Young and Heiner said.

That’s good for Fortescue and MinRes, both of whom supply ore grades well below mid-grade levels, though FMG is trying to reconfigure its mix with the recent opening of the Iron Bridge magnetite mine.

With a two year ramp up to 22Mtpa, the operation is expected to eventually make 10% of its product mix a 67% plus magnetite concentrate, suited for direct reduced iron plants.

Young and Heiner say they remain more bullish on miners with higher grade profiles for the medium and longer term as efforts to reduce steel industry emissions come to the fore.

“We remain more bullish on high grade over the medium to long run due to the global steel industry’s increased focus on decarbonisation which requires lower impurity higher grade iron ore,” they said.

“RIO & CIA offer investors the best high grade Fe production growth; RIO through the expansion of the Rhodes Ridge, Labrador iron ore and Simandou deposits, and CIA through the expansion of Bloom Lake.”

Iron ore punched through the US$130/t mark, rising over 2% in Singapore today to hit US$131/t for 62% Fe futures.

That helped FMG, BHP and Rio to respective gains of 3.45%, 1.78% and 2.55%, with Champion Iron 2.96% higher.

At a market cap of over $4.1 billion, CIA is now trading agonisingly close to an all time high, while $77 billion FMG is less than a dollar shy of its historic top despite concerns from analysts around the direction of its green energy plans and executive turnover.

The materials sector more generally gained almost 2.5%, led by strong runs in gold and battery metals as a positive 3.2% YoY inflation number in the USA raised hopes of higher prices for bullion as treasury yields fall and stronger demand for electric vehicles if it prompts the US Fed to lower rates.