Jefferies downgraded Rio Tinto, BHP, Vale and CSN Mineracao from Buy to Hold, citing near-term downside risk to iron ore and consensus forecasts, declining capital returns, accelerating cost pressures and increased operating risk.
The downgrades come amid a volatile iron ore price, BHP yesterday announcing iron ore output was 3% lower quarter-on-quarter and Rio Tinto last week reducing its iron ore guidance due to Western Australia's tight labour market.
Vale's iron ore fines production was 18.1% higher quarter-on-quarter at 89.4 million tonnes and above estimates of 87.3Mt, however the Brazil-based miner is trimming production of lower-margin ore - by 4Mt this current quarter and up to 15Mt in 2022 - as it prioritises value over volume.
It's also cut nickel and copper production guidance, from about 200,000t to 165,000-170,000t and from 360,000-380,000 to 295,000-300,000t respectively, as flagged in July - with impacts including the strike at Sudbury now exacerbated by Onca Puma's recent suspensions, a fire at Salobo and the Totten mine still halted following damage to the main shaft which led to a mine rescue effort.
Returning to iron ore, Vale pointed to the "sharp drop" in price of US$37/dmt for 62% fines compared with the July quarter.
Jefferies analyst Christopher LaFemina said the recent recovery in iron ore from $94/t to $124/t was likely to reverse, which could put renewed downward pressure on shares.
"Our base case assumption is that the benchmark iron ore price falls from $124/t today to an average of $90/t in 2022 and $80/t in the long term," he said in a note yesterday.
"We believe there is downside to 2022 consensus earnings and dividend forecasts due to lower iron ore prices and the risk of higher unit costs.
"We are bulls on the commodity cycle, but we have become more cautious on the iron ore miners even after the decline in their share prices over the past 2-3 months."
Jefferies lowered its target prices for BHP from A$45 to $40, Rio from 5,800p to 5,100p, Vale from US$19 to $15. FMG from A$16 to $14 and CMIN3 from BRL8 to BRL7, saying it preferred copper miners.
