Rio Tinto offers 'compelling' opportunity for the long term, suggests Jefferies

Rio Tinto, BHP and Vale share prices all reflect iron ore prices way below current spot levels, according to broker Jefferies, which concludes the three mining giants look good value as a result.

Markets currently are pricing in a benchmark iron ore price of US$81.37/t, it says, which compares to a spot price of US$99.05 and Jefferies' own long-term forecast of US$90/t.

“Chinese demand weakness is a near-term risk and valuation alone is not a catalyst for mining share prices to go higher.

“But our analysis indicates that shares of Rio, BHP, and Vale are trading at compelling levels now,” it said.

Using an enterprise value/underlying profit [EBITDA] ratio as a tool, the US bank estimates Rio is pricing in an iron price of US$81/t (on a 5.5x ratio), BHP is at US$86/t (6.5x) and Vale US$77 (at 5x).

Jefferies emphasises, however, that these are long-term forecasts, adding that it is “concerned” about seasonal and cyclical demand risk driving the iron ore price lower in the near future.

However, “If iron ore mining share prices are discounting a scenario more bearish than the outlook we envision, then our recommendation would be to buy these shares now before the iron ore price recovers.

“Yes, there will be near-term risks, but the opportunity for longer-term value investors could be now.”