Jefferies upgraded its stance on shares of Anglo American, BHP and Rio Tinto on Tuesday and lifted its iron and coal price forecasts as it took a look at the mining sector, arguing that it was undervalued and poised to recover.
“We had expected a demand soft patch to lead to a period of lower commodity prices, with a shift in policy needed to spark a gradual recovery in Chinese demand,” the bank said. “That shift is arguably here. While macro risks are clearly elevated and mining shares should be volatile, the sector is undervalued and poised to outperform as China recovers.”
Jefferies lifted Anglo American, BHP and Rio Tinto to ‘buy’ from ‘hold’. It lifted its price targets for the stocks to 4,500p from 3,800p, to 3,100p from 2,750p, and to 6,800p from 6,700p, respectively.
The bank said Chinese demand has recently been very weak due to the “catastrophic” impact of Covid lockdowns and a collapse in the country’s property markets. However, it also noted recent evidence of a shift in policy that indicates the government has become increasingly focused on the economy.
“Stimulus is being rolled out in steps and Covid lockdowns are reportedly being relaxed (although more lockdowns may happen in response to Covid flare-ups),” it said.
“We are cautiously optimistic that a slow recovery in Chinese demand is coming, and this should partly offset weaker demand elsewhere. We also recognise that the demand environment is still very risky, and mining shares will likely be volatile as a result.
“Eventually, we should be in an environment of a synchronised recovery in global demand, with commodity prices rising to new highs in some cases. This cycle will take a decade to play out, in our view, and continues to be underappreciated.”
