SocGen downgrades Rio, BHP as it turns more cautious on miners

Rio Tinto and BHP were knocked lower on Thursday as Societe Generale downgraded its recommendation on both stocks as it moved to a more cautious stance on most of the metals and mining stocks it covers following year-to-date gains.

SocGen noted that the Stoxx 600 basic resources index is up 16.5% year-to-date in USD terms, following a correction in the second half of last year. As of now, the index has recouped about half of the ground lost since the 2018 peak, leaving room for another leg up if macro conditions stay supportive, it said.

On the other hand, however, equities have outperformed base metals, which is a cautionary sign judging by historical precedents, just as bulk commodities seem to be peaking again.

"While sentiment towards the sector remains positive, it is uncertain how long this will last given mixed macroeconomic data and relatively subdued commodity price momentum," it said.

SocGen downgraded BHP to 'hold' from 'buy', taking the price target down to 1,680p from 1,780p. It noted that the shares have risen around 17% since its last update, mainly due to the distribution of proceeds from the disposal of onshore oil assets completed in December.

"We like BHP’s positioning in the commodity space and high degree of diversification, as well as the long-term growth optionality. That said, its free cash flow yield ranging 6-7% in 2019-21e does not look sufficient to have a more bullish stance at this juncture."

It cut Rio Tinto to 'hold' from 'sell' and reduced the price target to 3,830p from 3,880p. The bank said the downgrade reflects recent price gains on the back of the rebound in iron ore markets, which it reckons might be short-lived.

SocGen maintained its only 'buy' recommendation among the diversified miners on Glencore, as it argued the stock remains the best candidate for a re-rating on improved capital discipline.

Analysts at the bank said: "The current positive sentiment towards the sector is mainly supported by hopes for the nearing resolution of the US-China trade spat and evidence of renewed easing measures implemented by the Chinese authorities.

"However, neither is guaranteed to translate into stronger growth in the world’s second largest economy, and there are signs of economic momentum sputtering elsewhere."

At 1300 GMT, Rio shares were down 6.9% at 4,167.50p and BHP was 2.7% lower at 1,731.40p. Both stocks were also ex-dividend on Thursday.