Rio downgraded on coronavirus

RBC Capital Markets says the coronavirus outbreak will put the mining sector under pressure.
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The Rio Tinto booth at Investing in African Mining Indaba 2020

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"We think it is still early days for this virus and the potential implications," RBC said overnight.

"We expect commodities demand from China to fall sharply in Q1 and this likely causes prices to struggle as the market assesses inventory builds."

However, it expects pent-up demand from China as it recovers in the coming months, as well as a conducive environment from a monetary and stimulus perspective, to help offset the impact.

While RBC expects iron ore prices to be insulated by a decline in Chinese domestic production, it expects the price to drop as low as US$65 per tonne in the June quarter, with downside risk to $40-60/t.

It lowered its full-year forecast to $72.50/t from $77/t, but lifted 2021 forecasts to $65/t from $60/t due to expected Chinese stimulus as it recovers from the virus.

Overall we see an average drop of 8% to our 2020 EBITDA forecasts.

It lowered its copper price forecast for 2020 to $2.70 per pound and noted the potential downside risks.

Platinum group metal forecasts were lifted by 40% to $2200 an ounce for 2020 and by 100% to $3000/oz for next year.

RBC said it expected an overall average EBITDA drop of 8% across the diversified miners.

It named Anglo American a top pick due to its PGM exposure, but downgraded Rio Tinto and Antofagasta to underperform from sector perform.

RBC said while the net impact of coronavirus to iron ore was relatively neutral, a normalised iron ore price environment was negative for Rio's financials.

"Despite the near-term caution in the equity value for Rio, we believe the underlying company remains in a fundamentally strong position," RBC said.

"Strong bottom-half of the cost curve assets in iron ore, copper and aluminium, and strong operational capabilities should allow Rio to use its de-levered balance sheet in a lower commodity price environment to make a timely acquisition, especially if this coincided with a period where perhaps China was less amenable to outward investment.

"We think a well-timed transaction could see Rio generate significant long-term value for shareholders."

RBC expects Rio to declare a final dividend of $2 per share when it reports its full-year results on February 26, and is awaiting commentary on costs, particularly in iron ore and aluminium.

The price target for Rio was dropped to A$75 from $84.

Rio shares, which traded as high as $108 only three weeks ago, opened 0.5% lower at $98.065.