Should you buy BHP, Fortescue, or Rio Tinto shares?

Should you buy BHP Group Ltd (ASX:BHP), Fortescue Metals Group Limited (ASX:FMG), and Rio Tinto Limited (ASX:RIO) shares today?

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The shares of mining giants BHP Group Ltd (ASX: BHP), Fortescue Metals Group Limited (ASX: FMG), and Rio Tinto Limited (ASX: RIO) have come under a spot of pressure recently.

This has been caused by a reasonably sharp pullback in iron ore prices from their recent highs.

AGL capital raise demerger asx growth shares represented by question mark made out of cash notes

Image source: Getty Images

Where next for iron ore prices?

The Goldman Sachs commodities team has been looking into iron ore and has made some changes to its forecasts for the steel making ingredient.

Its team is now expecting a recovery in Brazilian exports and a Chinese environmental policy driven slowdown in steel production to narrow the seaborne iron ore deficit in 2021.

Instead of a 27Mt deficit, it is now forecasting a 9Mt deficit for the year. However, due to the strong start that iron ore prices have had in 2021, it has modestly upgraded its 2021 forecast to an average of US$135 per tonne. Goldman was previously forecasting US$120 per tonne.

Looking further ahead, the broker is forecasting a clear surplus in 2022 instead of another deficit. Its analysts have pencilled in a 23Mt surplus next year, compared to an 8Mt deficit previously. Whereas in 2023 Goldman Sachs expects the surplus to increase to 49Mt.

In light of this, its analysts are forecasting an average iron ore price of US$95 per tonne in 2022 and then a long run iron ore price of US$65 per tonne.

Fortunately for Fortescue and other iron ore producers, Goldman believes that in the near term, ongoing strong demand from China (for infrastructure and property) and mill margin strength should limit the sustainability of any iron ore sell-off in the next few months. Furthermore, China's environmental policies should provide more support for higher grade ore versus lower grade 58% ore.

Should you buy the miners?

Taking all that into account, the broker is still recommending investors buy BHP shares.

It has a buy rating and $53.40 price target on the Big Australian's shares. This compares to the latest BHP share price of $47.88.

As for the others, Goldman Sachs has a neutral rating and $20.40 price target on Fortescue's shares and a neutral rating and $118.80 price target on Rio Tinto's shares.

Goldman commented:

"The higher 2021 Fe forecast (US$135/t) has resulted in upgrades to our EPS estimates, NAVs and 12-m TPs for the 6 iron ore stocks under coverage. Although we are calling for a c. US$50/t or 30% drop in iron ore by year-end, we think the ongoing recovery in global steel demand in 2Q means it is too early to become bearish on the iron ore sector considering the strong FCF/dividend yields in 2021 (average 10%/7%) and 2022 (average 7%/6%), despite the sector trading at 1.15x NAV."

"BHP and RIO are trading on 5.5-6x, still below the 25-yr historical average of 6.5-7x, with FMG appearing overvalued at 8x compared to its historical average of 5x. Therefore, we see the drop in iron ore price as mostly priced into BHP and RIO already. We maintain our Buy on BHP due to strong FCF, production growth and 30% EBITDA exposure to our bullish view on met coal, copper and oil."

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Share Market News

Three people in a corporate office pour over a tablet, ready to invest.
Broker Notes

Brokers name 3 ASX shares to buy right now

Here's why brokers are feeling bullish about these three shares this week.

Read more »

Person with thumbs down and a red sad face poster covering their face.
Broker Notes

6 ASX 200 shares downgraded by the experts this week

Brokers have reduced their ratings on six ASX 200 shares, including PLS Group and Westpac this week.

Read more »

Disappointed man with his head on his hand looking at a falling share price his a laptop.
Share Fallers

Why Dateline Resourcs, Northern Star, Rox Resources, and Wesfarmers shares are dropping today

These shares are ending the week in the red. But why?

Read more »

Woman leaping in the air and standing out from her friends who are watching.
Share Gainers

3 ASX 200 stocks leaping higher in this week's slumping market

Investors sent these three ASX 200 stocks rocketing 24% to 28% in this week’s sliding market. But why?

Read more »

A young woman holding her phone smiles broadly and looks excited, after receiving good news.
Share Gainers

Why Eden Innovation, Elsight, Paladin Energy, and Zip shares are racing higher today

These shares are ending the week on a high. But why?

Read more »

Sell buy and hold on a digital screen with a man pointing at the sell square.
Broker Notes

Should you buy Wesfarmers shares amid rising profits and revenues?

A leading analyst offers his outlook for Wesfarmers shares.

Read more »

A man sits in deep thought with a pen held to his lips as he ponders his computer screen with a laptop open next to him on his desk in a home office environment.
Broker Notes

Buy, hold, sell: Evolution Mining, Netwealth, and Nufarm shares

What is Morgans saying about these popular shares? Let's dig deeper into things.

Read more »

Surprised child reading all about ASX 200 shares in a newspaper.
Share Market News

Why Paladin Energy, Alcoa and Zip shares are making headlines on Friday

Paladin Energy, Alcoa, and Zip shares are grabbing ASX investor interest on Friday. But why?

Read more »