The iron ore price has lifted as some analysts start to question whether its recent run of surprising strength could give a boost to major miners’ future performance.
Iron ore added 1 per cent to $US58.00 overnight, according to The Steel Index, after jumping to $US57.40 the previous day.
The commodity has spent much of this year defying analysts’ predictions for a sustained slump into the $US40s a tonne, boosted by restocking from Chinese steel mills and announcements of planned stimulus from the Chinese government, as well as speculative trade.
Analysts at Morgans are now calling buoyant commodity prices a “powerful tailwind” for earnings, at least for mining giant BHP Billition (BHP).
“If we applied spot commodity prices to our model [for BHP], it would trigger a 21 per cent upgrade to our fiscal 2017 earnings per share forecast,” Morgans wrote in a research note.
“We are not calling the next mining boom, but we do believe that the worst is now behind us. 2016 has been largely characterised by the stabilising commodity price environment, which we expect to continue in the second half.”
A 1 per cent price increase across the commodities BHP produces would translate into a 4 per cent increase in fiscal 2017 earnings per share or a 2 per cent increase in valuation, according to Morgans’ model.
“Short-term factors such as broader volatility and seasonal demand weakness aside, we see BHP as holding a significant value proposition from a mere stabilisation of market sentiment,” Morgans said, reaffirming its add call on the stock and slightly reducing its target price to $26.30. “A continuation of the recent performance across some key metals could see upside risk to our fiscal 2017 estimates.”
The optimism follows a call from Macquarie last month that also predicted the worst of the cycle is behind diversified miners.
But several banks are still warning that more pain is ahead for iron ore as supply outpaces demand, with some forecasts as low as $US40 a tonne.
In London trade, BHP Billiton rose 1.4 per cent, while Rio Tinto also added 1.4 per cent.
Source:theaustralian