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Are BHP, Rio Tinto shares a ‘buy’ now?

Global iron ore producers BHP and Rio Tinto have been beset by challenges in China, including a recent power shortage.

  • BHP (ASX: BHP) share price sheds 2.8% day-on-day
  • Rio Tinto (ASX: RIO) slides to A$95.17 per share
  • Some factories in China paused production, depressing iron ore prices
  • But the mining heavyweights’ dividends could stay above pre-Covid levels
  • Keen to bet on BHP Group and Rio Tinto’s falling share price? Open an account with us to go short on the stocks.

Heavyweight mining stocks slide further

Shares of Rio Tinto and BHP, part of Australia’s big mining triumvirate, continued to skid on Wednesday as investors weighed the potential impact of China’s widening power crunch as well as the Evergrande fallout.

As of 11:42 AEST in Sydney, BHP was trading 2.8% lower at A$35.84, while Rio fell 2.4% to A$95.17 per share.

In China, a power shortage has halted production at several factories, including many that supply components to Apple Inc and Tesla Inc, Reuters reported.

The resultant demand concerns thus depressed iron ore and base metal prices, weighing on mining giants’ shares. Australian miners are dependent on Chinese demand for raw materials.

Miners’ dividends ‘well covered’: Bloomberg

Despite the falling free-cash-flow of metals and mining companies, their dividend payments ‘should remain above pre-pandemic levels’, said Bloomberg Intelligence (BI) on Tuesday.

BI expects the overall high iron ore price in 1H 2021 to enable Rio and BHP to pay high dividends, which should be ‘well covered’ from 2021 to 2023, assuming iron ore stays at roughly US$100 per tonne.

Given their low financial leverage, Rio and BHP may use their balance sheets to increase shareholder remuneration via special dividends or buybacks, the analysts added.

What is the outlook on BHP shares?

BHP’s ASX-listed stock attracted seven ‘buy’ ratings from analysts, as well as five ‘hold’ and one ‘sell’, as of Wednesday.

On average, the research teams targeted A$47.80 per BHP share, Bloomberg data showed. That implies a potential upside of nearly 30% based on Tuesday’s close.

Since late last week, fresh recommendations from analysts have been optimistic. BHP was rated ‘outperform’ or ‘buy’ by RBC Capital, Macquarie, Morningstar, Bernstein, Shaw and Partners, and Jefferies.

The target prices from these bullish analysts ranged from A$42 to A$61, according to Bloomberg data.

Rio Tinto reaches labour deal in Canada

On Sunday, Rio said it has reached an agreement in principle with Canadian union Unifor for the company’s operations in the western Canadian province of British Columbia, after weeks of second-round negotiations.

The first round, regarding proposed changes to workers’ retirement benefits and unresolved grievances, fell through in July.

Meanwhile, the Australia-listed RIO shares garnered seven ‘buy’, seven ‘hold’, and two ‘sell’ calls from analysts as of Wednesday.

Their average target price was A$119.49, according to Bloomberg data. That implies a potential upside of about 23% based on Tuesday’s close.

Operationally, Rio ‘remains a turnaround story’, said JPMorgan. The analysts are ‘overweight’ on the stock and targeting A$150, favouring its ‘relatively inexpensive valuation metrics and strong shareholder returns’.

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This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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