In the annals of “too late the hero”, the biography of sell side research, this one would rank quite highly were the tome already not so unwieldy huge. From The Oz blog:
Our Global Team has lowered iron ore price forecasts by 24%/23%/16% in CY15/16/17 to US$67/65/69/t.
Impact on BHP. Our BHP NPAT falls 10%/23%/19% in FY15/16/17, and our NPV is down 11% to A$34ps (P/NPV 0.89x). Revised PE estimates are 16.2x/14.7x in FY16/17. We expect a dividend shortfall of ~US$1.9bn over FY15, with net debt rising to US$28.6bn by the end of FY16 (from US$25.8bn at the end of FY14).
Impact on RIO. Our RIO NPAT has reduced 2%/32%/24% in CY14/15/16, while our NPV is down 13% to A$67ps (P/NPV 0.86x). Revised PE estimates are 14.4x & 12.4x in CY15/16. We expect a dividend shortfall of ~US$1.4bn over CY15, with net debt rising to US$18.6bn by the end of CY15, and gearing at 23%. RIO’s target gearing is 20-30% which would allow room for a capital management initiative (not contained in our estimates), while maintaining gearing below the top end of the range…
Downgrade to Neutral. We continue to like FMG due to strong operational performance, long-life assets, and good management. However, we believe iron ore price headwinds will impact the stock near-term. We expect prices to trough in the Sept. 2015 quarter, which could provide better entry point.
…Significant impact on cash flow despite lower capex and costs. We have factored in material reductions in capex (as announced), and high grading of the Chichesters over the next few years (JPMe). This has lowered our breakeven price estimate to US$66/t in FY15. Despite this, we forecast net debt to rise from US$7.2bn in FY14 to US$7.6bn in FY17, due to pre-payments, and catch-up tax. Our NPV falls from A$4.33ps to A$2.20ps.
No doubt we’ll see sell orders for all three as iron ore passes through $50.
