Goldman destroys iron ore, RIO forecast

It’s awwn, from Goldies today:

1

Up to 50% of Tier 2 iron ore output at risk of closure
The outlook for the iron ore industry has become increasingly clear in the 12 months since the market fell into oversupply, and we reflect this increased confidence in our updated forecasts. We expect seaborne iron ore demand to peak in 2016 as the displacement of marginal Chinese iron ore production fails to offset a contraction in domestic steel consumption, while the risks of a demand shock increase over time as the Chinese steel stock converges towards the OECD average of 11 tonnes per capita. Faced with a mature market, we believe Tier 1 producers have no alternative but to reduce unit costs and to exploit their asset base more efficiently; their production volumes are not at risk from a lower iron ore price.

And on RIO:

Our Global Macro team believes that iron ore prices will continue to trend towards US$40/t over the next 18 months as continued new supply and lackluster demand cause a glut of supply. Furthermore, we now believe that iron ore prices are unlikely to recover above US$50/t again. With iron ore representing c.60% of CY15E EBITDA for RIO, the forecast continued reduction in prices places significant pressure on earnings, cashflow, dividend and ultimately valuation on the company. The stock is trading on +20x 2016E P/E and a substantial premium to our DCF of A$45/share and new 12-month target price of A$47. Given the significant downside potential to target price and high dividend payout ratio, we downgrade RIO to Sell (from Neutral).

Still too high for RIO. Prices are going below the cost of production for it as well. Ditto for BHP reduced to $27 target and better for FMG at 50 cents!

David Llewellyn-Smith
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Comments

  1. Well my play as advised on FMG was just perfect – 100% as i predicted – my $1.85 April calls are sold and Im on Voyage !! My 29.50 BHP April calls are pefectly positioned for the 22 April when BHP announces their bumber production result > 20% qtr sales and production increase from 1st Qtr 2014 ( Jan-Mar ) – Sell out same day because April expiry is 23 April. I am thinking of a private investor service ?? Anyone that followed my advice on FMG has made a huge amount of money this morning – Is anyone interested?

      • Hey denis – Not so – I am no employee of FMG – the statistics can b e pulled from a subscription to MYSTEEL – research goes along way – noone makes money by blindingly following the pack – you have to do your research and I was so kind and generous to offer exactly the results of the research on this Forum – not only that I guided users to exactly what I had done and what would transpire – you are correct – 100% exactly as I predicted – but only from the research and stats pulled from MYSTEEL – LIFE IS GOOD

      • Haha, I was only playing mate. I agree, you smashed it today. Well done, enjoy it! 🙂

  2. $44 in 2016? This is too generous! Any price forecast above mid teens in 2016 is too optimistic. IO will drop below 0 by the end of this decade.

    • You will never make any money because all you think is one way – Down – $0 is just plain stupidity

  3. Great call joseph…. i’ve been looking to shuffle BHP out of my portfolio for a while so might have to take your advice!

  4. When can we talk about Super.

    Banks, Mining, Real Estate and Australians Super look decidedly sick going forward.

  5. So the world largest commodity broker, Goldman Sach’s is bagging iron ore when the retail price of steel is rising, hello suckers.