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Morningstar | Vale Supply Issues and a Dovish Fed Sees Optimism Return to the Miners and Overvaluation Grow

The meaningful fall in resources stocks saw pockets of value emerging among the global miners in November. The S&P/ASX 200 Resources index fell 15% in less than two months. But since the end of November, shares have rallied on iron ore supply concerns and the apparent easing in the U.S. Federal Reserve’s tightening bias. The resources index is back at five-year highs.

We see the greatest overvaluation among the bulk producers, particularly iron ore, which is benefiting from Vale’s disruption. The miners generally still face longer-term demand challenges. Buoyant commodity and share prices do not reflect the inevitable shift in China’s economic growth towards less commodity consuming activities. Aside from iron ore where supply has been impacted by the disruptions at Vale, prices for the mined commodities were generally in line with our expectations for the fourth quarter of 2018. We’ve made no major changes to our commodity estimates for 2019 and beyond.

We’ve updated our fair value estimates for Anglo American, Glencore, and Teck Resources post the December 2018 quarter production actuals and prices. We’ve made only small changes for those firms with our key forecasts for coal and copper unchanged. The largest valuation change is for Anglo American, up 4% to GBX 1,200 per share from GBX 1,150. The increase is primarily due to the time value of money, the higher spot palladium price, and a small benefit from our higher near-term iron ore price forecasts. For Teck, we raise our fair value estimate by 2% to CAD 24.50 due to the time value of money. For Glencore, our GBX 250 per share fair value estimate is unchanged. The recent decline in the cobalt price has offset the benefit of the time value of money.