What’s the outlook for the FMG, BHP and Rio Tinto share prices?

August earnings season in focus

Despite historically high iron ore prices, Australia’s big three miners – Fortescue Metals Group (FMG), BHP Group (BHP) and Rio Tinto (RIO) – posted mixed full and half-year results in August.

Looking at the headline figure’s from the big three’s recent results release:

• FMG reported higher FY20 earnings (EBITDA) and profits (NPAT), while full-year dividends also climbed, coming in at 176 cents per share.
• By comparison, BHP reported broad based declines, with earnings, profits and dividends all coming in lower in FY20.
• Like BHP, RIO also witnessed declines over the half ending 30 June, reporting lower underlying earnings and EBITDA, as well as a diminished dividend of 155 US cents per share.

BHP's Mike Henry described the miner's results as reflecting the strength of the company; FMG's Elizabeth Gaines emphasised the miner's focus on 'future growth and development'; while RIO's J-S Jacque's touted the agility and adaptability of his company.

Unsurprisingly, the share price performance of these three stocks has been equally diverse over the last month. Since 3 August, BHP has risen 3.11%, FMG eked out a gain of 0.4%, while RIO has seen its share price fall 3.89%.

This comes as iron ore prices continue to trade around multi-year highs – with CME's iron ore September future's contract currently trading at US$126.06 per tonne.

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How did analysts respond?

Below we survey how analysts responded – in terms of both ratings and price targets – in the immediate aftermath of Rio Tinto, FMG and BHP Group’s half and full-year results releases.

Rio Tinto share price outlook

Following the H1 release, analysts from Credit Suisse reiterated their Underperform rating and $86.00 price target on the miner, saying:

‘Whilst there has been a credibility hit on the back of Juukan and the findings are still to come, operationally the key revenue drivers are performing well and RIO continues to deliver incredibly healthy returns for its shareholders.’

Morgan Stanley cited a $91.50 price target and Equal-weight rating, while also describing the H1 as a:

‘Clean set of numbers from RIO with EBITDA 3% better than MS and consensus on better Ali, revenue and Copper costs.’

Maintaining an Outperform rating and $110.00 price target, analysts from Macquarie Wealth management noted that RIO’s:

‘Earnings result was mixed with a beat in earnings offset by weaker cash flow and a softer dividend payment. Production guidance and costs for CY20 remain unchanged and the key iron-ore projects remain on track.’

BHP share price outlook

Although Credit Suisse analysts described BHP’s FY20 results as ‘soft’, the investment bank, said:

‘Despite keeping the Neutral rating we still prefer BHP to RIO given the far greater optionality imbedded in the portfolio relatively in our view.’

Credit Suisse put a $37.00 price target on BHP following the FY20 release.

Unlike Credit Suisse, analysts from Macquarie Wealth Management remained constructive on BHP in the wake of its full-year report, reiterating an Outperform rating and $42.00 price target, with it being argued that:

‘Buoyant iron-ore prices underpin strong earnings upgrade momentum with a spot price scenario generating 35% and 70% higher earnings for FY21 and FY22 than our forecasts, respectively.’

By comparison, Morgan Stanley described the miner's FY20 result as 'slightly weak', though reiterated an Overweight rating and $36.85 price target.

FMG share price outlook

Credit Suisse analysts downgraded their rating on FMG from Neutral to Underperform in the wake of the miner's 2020 result, citing recent share price outperformance as the main driver of this decision. Even so, it was noted that the these full-year figures contained:

‘Yet another clean set of numbers with a strong dividend again providing the best yield for shareholders in our coverage universe.’

The investment bank has a 12-month price target of $15.00 per share on FMG.

Unlike Credit Suisse, Macquarie analysts remained bullish on FMG following its full-year report – reiterating an Outperform rating and $19.00 price target. The investment bank has favourably viewed the sector for some time now and took the chance to note that:

‘A spot price scenario generates 92% and 234% higher earnings than our forecasts for FY21 and FY22 and translates to free cash flow yields of 17-18%.’

Morgan Stanley appears the most bearish of the three brokers, assigning FMG an Equal-weight rating and $12.65 price target – implying substantial downside from current price levels.

What are your thoughts on Australia’s mining sector?

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