Latest Comsec recommendation report -
STRONGER CHINESE STEEL SUPPORTS HIGHER IRON ORE PRICES
• Following our recent China tour, CBA has revised up its CY13 Chinese steel production forecast
from 749Mt to 783Mt. We have also revised up CY14 Chinese steel from 781Mt to 822Mt. Please
refer to a separate Commodity Strategy note, published on 27 September 2013.
• The additional 40Mt of Chinese steel production in CY14 will consume an additional 65Mt of iron ore
production. This will absorb a significant proportion of the new 100Mt of seaborne supply which is
expected from Australia in CY14.
• The net effect is that less high-cost Chinese domestic iron ore supply will be rationed out of the
market and the market clearing price for iron ore will be higher. We upgrade CY14 from USD107/t to
USD120/t and CY15 from USD100/t to USD108/t.
SIGNIFICANT EARNINGS UPGRADES FOR ALL IRON ORE COMPANIES
• The new commodity price forecasts result in the largest upgrades to BHP and RIO earnings
forecasts for three years; 14-20% in 2014 and 10-11% in 2015.
• FMG’s operating leverage is higher and the upgrades are more substantial; 51% in FY14 and 46% in
FY15. More importantly, FMG is now strongly free cash flow positive (USD2.5b in FY14 and
USD3.8b in FY15) and will begin to rapidly reduce its excessively high debt levels.
• Upgrades to the juniors are even more substantial, given their higher costs and lower margins. Full
details are in Figure 2.
Figure 1: Iron ore equities - recommendations and price targets
Price Price Target Upside Recommendation
Company ASX (A$) (A$)
BHP Billiton BHP 35.31 43.00 22% Overweight
Rio Tinto RIO 60.29 71.00 18% Neutral
Fortescue Metals FMG 4.78 5.50 15% Overweight
Atlas Iron AGO 0.85 1.43 69% Overweight
Western Desert Resources WDR 0.68 1.05 55% Overweight
Centaurus Metals CTM 0.17 0.32 93% Overweight
BC Iron BCI 4.44 6.01 35% Overweight
Mount Gibson MGX 0.72 0.62 -13% Underweight
Gindalbie Metals GBG 0.13 0.10 -23% Underweight
Source: IRESS, CBA estimates
INVESTMENT VIEW
• We maintain Overweight recommendations on BHP and FMG and Neutral on RIO. The diversified
miners will generate higher free cash flow over the next 2-3 years as volumes rise, costs reduce and
capex is pulled back.
• Of the junior iron ore producers, our preference is for BC Iron and Atlas Iron. We also like the new
project upside in WDR and CTM.