And here they come. Note from UBS:
Sell: macro headwinds with Fed hawkish & China acting to deflate commodities
We downgrade RIO to Sell (from Neutral) with an unchanged A$104/s target. The stock has generated a TSR of 79% over 12mths driven by the strong iron ore price (+104%) & record cash returns; we estimate it now discounts an iron ore price of $80-90/t vs our long-term price of $65/t. RIO generates significant cash flow (spot yield ~25% interactive model) & shareholder returns should stay elevated in 2021. However, in our view current FCF & dividends are not sustainable as we expect the iron ore price to fall by >50% (from >$200/t to ~$90) over 12-18mths; we do not believe RIO’s valuation is compelling at a ‘normalised’ iron ore price (FCF yield 5.5% @$80/t). Near-term risks for the commodity complex are increasing with the Fed turning more hawkish & China taking action to deflate commodities (eg by selling strategic base metal reserves note); we expect this to accelerate the unwinding of the ‘reflation trade’.
