Why are the BHP and RIO share prices rebounding?

Posted: 13 January 2022 12:31 pm
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Shares in iron ore miners BHP, Rio Tinto and Fortescue Metals have climbed 12-15% over the last month and continued their strong gains today.

Mining shares are underpinning the gains on the ASX on Thursday, with BHP (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG) among the best performers, rising between 1.8% and 3.3%.

Even a smaller player like Mineral Resources (ASX: MIN) had notched up gains of 2.5%, at the time of writing.

Why have the BHP and RIO stock prices lifted?

Mining shares have lifted after spot iron ore prices jumped 2.3% in the previous session to a 4-month high of US$131.60 a tonne.

Prices for the key steel-making ingredient have been on the mend over the last several weeks and have now rebounded around 25% over the past month.

The recent gains have largely been driven by hopes about recovering demand based on the likelihood of improved steel production after restrictions on factory activity after the Beijing 2022 Winter Olympics next month.

The most-actively traded stainless steel contract on the Shanghai Futures Exchange jumped 5.3% to the equivalent of US$2,812.39 per tonne, with analysts expecting restocking demand before the upcoming holiday period could shore up iron ore prices.

In recent days, prices have also received a boost on reports of bad weather halting operations at iron ore mines in Brazil, which will have an impact on the overall supply for several weeks.

Improving outlook?

The recent gains are a welcome break from the swift drop in iron ore prices during the second half of 2021, which led to the big miners facing downgrades from analysts over concerns about the sustainability of their record profits.

But the tide could be turning, with Goldman Sachs saying Australia's major diversified miners appear "undervalued".

GS analyst Paul Young noted that BHP and Rio Tinto currently trade around 4 times their earning (EBITDA), compared to historical multiples of 6-7 times.

On a free cash flow yield basis, they are trading at 11-12%, below the 15-year historical average of just 7-8%.

Among the factors benefiting the diversified miners are the recent gains in copper prices.

Overnight, copper prices broke through US$10,000 a tonne for the first time since October, amid renewed supply fears as inventories dwindle.

Industrial metals have seen gains in recent weeks as concerns ease over economic growth in top metals consumer China.

Meanwhile, BHP’s unified listing on the ASX is also expected to drive up demand for the stock due to its likely increased weightage in the flagship market indices.

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