On the back of expectations that iron ore and coal sectors will see volatility in the near term, RBC Capital Markets reviewed its target prices for Australian miners, lifting the target price for BHP Billiton Group to A$30 per share and trimming Rio Tinto to A$76 per share.
"Iron ore and coking coal, whilst coming off their early year highs, continue to benefit from supply-side reforms in China, though we expect some level of volatility in the near-term around trade," the analysts wrote in a June 4 note.
BHP's target price was increased from A$29 per share previously amid expectations that proceeds from the company's sale of U.S. onshore assets will be returned to shareholders.
"The decision to exit U.S. onshore is positive and is, in our view, the next logical catalyst," the team noted, adding that the market will value a cash sale best.
In terms of near term-production growth RBC did not foresee significant changes.
While the company's South Flank iron ore project in Western Australia and the Olympic Dam brownfield expansion copper project in South Australia are expected to support margins, the analysts said they will not have a major impact on production growth, given the scale of BHP.
Although, they flagged that the miner can look towards mergers and acquisitions to support growth in the medium term.
RBC retained its sector perform rating for BHP but lifted its financial estimates for the company in the near term. It now expects EBITDA in 2018 to total US$23.27 billion and revised its EBITDA forecasts for 2019 and 2020 up by 3% and 1%, respectively, to US$23.95 billion and US$22.33 billion.
Rio Tinto's sector perform rating was also maintained.
However, amid a "relatively flat growth profile" the analysts cut their financial estimates for the company, lowering 2019 EBITDA by 4% to US$17.01 billion and 2020 EBITDA by 3% to US$17.72 billion. The stock now has a target price of A$76 per share, compared to A$77 per share previously.
Following Rio Tinto's sale of its coal assets and ongoing talks over exiting the Grasberg copper project in Indonesia, RBC expected the company to look for M&A opportunities as an avenue to growth.
"Whilst these divestments work to further streamline the portfolio and bolster the balance sheet — supporting the potential for additional capital returns — the company is faced with a relatively flat growth profile. In our view, this will likely increase the conversation around M&A," the analysts wrote. "Absent of any additional capital requirements, we expect capital returns (from divestments) — whether through special dividends or buybacks — to again feature."
A lack of special dividend or buyback from Rio Tinto should "fuel the fire" that the company is looking for assets.
