We think the near term outlook for the majors remains difficult. We expect iron ore to remain weak over H2, while other key commodities such as oil, copper, metallurgical coal, and aluminium are all facing near term headwinds. Our preference for RIO (Sector Perform) over BHP (Underperform) is based on its more attractive valuation metrics. We maintain a Sector Perform rating on FMG,however, in the current challenging iron ore markets we think it remains a difficult investment proposition.
Unsurprisingly, it is the higher cost, higher geared FMG who exhibits the most leverage. At a $US45 iron ore price, FMG NPAT falls from our base case of $US182 million in FY16 to losses of $US288 million and from our $US531 million base case to a loss of $US146 million in FY17. At $US45, BHP NPAT would fall approximately 20 per cent in each year, Rio by 24 per cent in FY16 and 42 per cent in FY17.
From RBC:
Under a more extreme downside scenario of $US35 a tonne, FMG losses increase to approximately $US1 billion each year, but both BHP and Rio remain profitable and FCF positive. With its heavier iron ore weighting, Rio does suffer more than BHP, with FY17 earnings approaching breakeven at $US663 million.
For both BHP and RIO the ability to cover dividends is stretched, but manageable, at a $US45 iron ore price. With BHPs $US6.5 billion dividend commitment and RIO’s $US4 billion commitment, neither would generate enough free cash in FY16 to cover its dividend, however, BHP would come close with $US5.1 billion free cash. In FY17 at $US45 a tonne, Rio would just cover its dividend with $US4.7 billion of FCF, BHP would again be slightly short with $US5 billion.
Pretty close to my own numbers. The MB iron ore price outlook is $35, $30 and $25 for ’16, ’17 and ’18 so needless to say the above firms are all buggered on that outlook.
