Macquarie Group has made a few changes to its recommended commodities stock exposures.
Iron ore has received the most attention recently and Macquarie is making minimal revisions to its forecasts. It still believes iron ore will average $US130 per tonne for 2013 and it makes a point that it will not be chasing the spot iron ore price higher.
Given the strong recent performance in iron ore equities and coupled with Macquarie’s view that prices beyond $US140 per tonne are largely unsustainable, the broker is looking to take some profits among the iron ore names.
In the pure play space, it has downgraded Atlas Iron to underperform from neutral and retained its price target of $1.65 per share. On its estimates, Atlas now exhibits the most stretched valuation of the iron ore stocks in sector relative terms. It also believes the company faces challenges in the coming months in meeting its targeting production rates.
Macquarie’s preferred pick among the pure iron ore miner names is BC Iron, which it rates as outperform with a price target of $3.90 per share. The broker believes the recent transaction with Fortescue to purchase an additional 25 per cent of the Nullagine project and lift JV output to 6 million tonnes per annum was significantly accretive to both earnings and its discount cash flow valuation.
The big diversified names have not escaped either with Macquarie reducing both Rio Tinto and BHP Billiton to neutral from outperform. "Although neither stock is expensive in absolute terms, both are trading at smaller discounts to net asset value than their historic averages and PER multiples have moved up into line with the market. What's more, we see the potential for consensus earnings to drift down into next month's result releases. Consequently, while we retain a positive bias on both, we expect recent momentum to slow,” Macquarie Group said in a research note.
Having said that, it slightly favours Rio Tinto over BHP Billiton given its greater valuation supports, although it notes that Rio may be more exposed to a pullback in iron ore prices.