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What’s the outlook for the FMG, BHP and Rio Tinto share prices?

Despite historically high iron ore prices, Australia’s big three miners – Fortescue Metals Group (FMG), BHP Group (BHP) and Rio Tinto (RIO) – posted mixed full and half-year results in August. Looking at the headline figure’s from the big three’s recent results release:

August earnings season in focus

Despite historically high iron ore prices, Australia’s big three miners – Fortescue Metals Group (FMG), BHP Group (BHP) and Rio Tinto (RIO) – posted mixed full and half-year results in August.

Looking at the headline figure’s from the big three’s recent results release:

  • FMG reported higher FY20 earnings (EBITDA) and profits (NPAT), while full-year dividends also climbed, coming in at 176 cents per share.
  • By comparison, BHP reported broad based declines, with earnings, profits and dividends all coming in lower in FY20.
  • Like BHP, RIO also witnessed declines over the half ending 30 June, reporting lower underlying earnings and EBITDA, as well as a diminished dividend of 155 US cents per share.

BHP’s Mike Henry described the miner’s results as reflecting the strength of the company; FMG’s Elizabeth Gaines emphasised the miner’s focus on ‘future growth and development’; while RIO’s J-S Jacque’s touted the agility and adaptability of his company.

Unsurprisingly, the share price performance of these three stocks has been equally diverse over the last month. Since 3 August, BHP has risen 3.11%, FMG eked out a gain of 0.4%, while RIO has seen its share price fall 3.89%.

This comes as iron ore prices continue to trade around multi-year highs – with CME’s iron ore September future’s contract currently trading at US$126.06 per tonne.

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How did analysts respond?

Below we survey how analysts responded – in terms of both ratings and price targets – in the immediate aftermath of Rio Tinto, FMG and BHP Group’s half and full-year results releases.

Rio Tinto share price outlook

Following the H1 release, analysts from Credit Suisse reiterated their Underperform rating and $86.00 price target on the miner, saying:

‘Whilst there has been a credibility hit on the back of Juukan and the findings are still to come, operationally the key revenue drivers are performing well and RIO continues to deliver incredibly healthy returns for its shareholders.’

Morgan Stanley cited a $91.50 price target and Equal-weight rating, while also describing the H1 as a:

‘Clean set of numbers from RIO with EBITDA 3% better than MS and consensus on better Ali, revenue and Copper costs.’

Maintaining an Outperform rating and $110.00 price target, analysts from Macquarie Wealth management noted that RIO’s:

‘Earnings result was mixed with a beat in earnings offset by weaker cash flow and a softer dividend payment. Production guidance and costs for CY20 remain unchanged and the key iron-ore projects remain on track.’

BHP share price outlook

Although Credit Suisse analysts described BHP’s FY20 results as ‘soft’, the investment bank, said:

‘Despite keeping the Neutral rating we still prefer BHP to RIO given the far greater optionality imbedded in the portfolio relatively in our view.’

Credit Suisse put a $37.00 price target on BHP following the FY20 release.

Unlike Credit Suisse, analysts from Macquarie Wealth Management remained constructive on BHP in the wake of its full-year report, reiterating an Outperform rating and $42.00 price target, with it being argued that:

‘Buoyant iron-ore prices underpin strong earnings upgrade momentum with a spot price scenario generating 35% and 70% higher earnings for FY21 and FY22 than our forecasts, respectively.’

By comparison, Morgan Stanley described the miner’s FY20 result as ‘slightly weak’, though reiterated an Overweight rating and $36.85 price target.

FMG share price outlook

Credit Suisse analysts downgraded their rating on FMG from Neutral to Underperform in the wake of the miner’s 2020 result, citing recent share price outperformance as the main driver of this decision. Even so, it was noted that the these full-year figures contained:

‘Yet another clean set of numbers with a strong dividend again providing the best yield for shareholders in our coverage universe.’

The investment bank has a 12-month price target of $15.00 per share on FMG.

Unlike Credit Suisse, Macquarie analysts remained bullish on FMG following its full-year report – reiterating an Outperform rating and $19.00 price target. The investment bank has favourably viewed the sector for some time now and took the chance to note that:

‘A spot price scenario generates 92% and 234% higher earnings than our forecasts for FY21 and FY22 and translates to free cash flow yields of 17-18%.’

Morgan Stanley appears the most bearish of the three brokers, assigning FMG an Equal-weight rating and $12.65 price target – implying substantial downside from current price levels.

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Daily Financial News

Don’t Count On JPY Correction; Staying Long GBP/JPY

The path of the potential pace of the JPY decline may still be underestimated by markets, which continue trading the JPY long.

While the 10% USDJPY advance from September lows looks impressive from a momentum point of view, it may no thave been driven by Japan’s institutional investors reducing their hedging ratios or Japan’s household sector reestablishing carry trades.

Instead, investors seemed to have been caught on the wrong foot, concerned about a sudden decline of risk appetite or the incoming US administration being focused on trade issues and not on spending. Spending requires funding and indeed the President-elect Trump’s team appears to be focused on funding. Here are a few examples: Reducing corporate taxation may pave the way for US corporates repatriating some of their USD2.6trn accumulated foreign profits. Cutting bank regulation could increase the risk-absorbing capacity within bank balance sheets. Hence, funding conditions – including for the sovereign – might generally ease. De-regulating the oil sector would help the trade balance, slowing the anticipated increase in the US current account deficit. The US current account deficit presently runs at 2.6% of GDP, which is below worrisome levels. Should the incoming government push for early trade restrictions, reaction (including Asian sovereigns reducing their holdings) could increase US funding costs, which runs against the interest of the Trump team.

Instead of counting on risk aversion to stop the JPY depreciation, we expect nominal yield differentials and the Fed moderately hiking rates to unleash capital outflows from Japan.The yield differential argumenthas become more compelling with the BoJ turning into yield curve managers. Via this policy move, rising inflation rates push JPY real rates and yields lower, which will weaken the JPY. Exhibit 12 shows how much Japan’s labor market conditions have tightened. A minor surge in corporate profitability may now be sufficient, pushing Japan wages up and implicity real yields lower.

JPY dynamics are diametrical to last year . Last year, the JGB’s “exhausted”yield curve left the BoJ without a tool to push real yields low enough to adequately address the weakened nominal GDP outlook. JPY remained artificially high at a time when the US opted for sharply lower real yields. USDJPY had to decline, triggering JPY bullish secondround effects via JPY-based financial institutions increasing their FX hedge ratios and Japan’s retail sector cutting its carry trade exposures. Now the opposite seems to be happening. The managed JGB curve suggests rising inflation expectations are driving Japan’s real yield lower. The Fed reluctantly hiking rates may keep risk appetite supported but increase USD hedging costs.Financial institutions reducinghedge ratios and Japan’s household sector piling back into the carry trade could provide secondround JPY weakening effects

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Daily Financial News

Mexico raises interest rates, cites Trump as risk

The head of Mexico’s central bank says U.S. Republican candidate Donald Trump represents a “hurricane” sized threat to Mexico.

Banco de Mexico Gov. Agustin Carstens told the Radio Formula network Friday that a Trump presidency “would be a hurricane and a particularly intense one if he fulfills what he has been saying in his campaign.”

Trump has proposed building a wall along the border and re-negotiating the North American Free Trade Agreement.

Mexico’s central bank raised its prime lending rate by half a percent to 4.75 percent Thursday, citing “nervousness surrounding the possible consequences of the U.S. elections, whose implications for Mexico could be particularly significant.”

Mexico’s peso had lost about 6 percent in value against the dollar since mid-August. It recovered slightly after the rate hike

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Financial News

Africa’s first Fairtrade certified gold co-operative offers hope to gold miners living in poverty

Syanyonja Artisan Miners’ Alliance (SAMA) has become the first artisanal small scale mining co-operative in Africa to become Fairtrade certified, bringing much needed hope to impoverished communities who risk their lives to mine the rich gold seam that runs around Lake Victoria.

SAMA is one of nine previously informal groups from Uganda, Kenya and Tanzania which has benefitted from a pilot project launched by Fairtrade in 2013. This innovative program aims to extend the benefits of Fairtrade gold to artisanal miners across East Africa.

In that short time, SAMA has undergone training in business and entrepreneurship, as well as safe use of mercury, internal control systems, labour rights and better working conditions, health and safety and more. Previously, daily contact with toxic chemicals used to process gold meant members risked disease, premature births and even death.  Fairtrade gold was first launched in 2011, and SAMA now joins Fairtrade certified gold mines MACDESA, AURELSA and SOTRAMI in Peru.

The co-operative produces just 5 kg gold per year, but nevertheless has the potential to significantly benefit many people in the local community through better conditions through certification. It is expected that Fairtrade and organizations like Cred Jewellery will support the miners, ensuring their gold can be refined and made available to jewellers in the UK and other markets.

Gonzaga Mungai, Gold Manager at Fairtrade Africa said: “This is a truly momentous and historical achievement and the realisation of a dream that is many years in the making. Gold production is an important source of income for people in rural economies. Congratulations to SAMA, it sets a precedent which shows that if groups like this can achieve certification, then it can work for others right across the African continent.”

The Fairtrade Gold Standard encourages better practice and changes to come in line with international regulation around the production and trade of so-called ‘conflict minerals’. Under the Standard, miners are required to:

  • Uphold a human rights policy preventing war crimes, bribery, money laundering and child labour
  • Clearly represent where the minerals were mined
  • Minimise the risks of conflict minerals through robust risk assessments and collaboration across supply chains
  • Report to buyers and trading partners regarding the risks of conflict minerals

Now in its second phase, the programme will focus on supporting other mining groups in the region to access affordable loans and explore a phased approach to accessing the Fairtrade market, allowing more mining co-operatives across Africa to participate in the programme.

Gonzaga added: “Sourcing African metals from smallscale miners in the Great Lakes Region is the responsible thing to do. For a long time companies have avoided buying gold from this region, with devastating consequences for impoverished communities who were already struggling. It has driven trade deeper underground, as unscrupulous buyers pay lower prices and launder illegal gold into legitimate supply chains. That’s why we have chosen to work with these groups to help them earn more from their gold within a robust compliance system that offers social, environmental, and economic protections.”

The Fairtrade gold programme offers a small but scalable solution to sustainable sourcing of gold from the region in line with Section 1502 of the Dodd-Frank Act in the US, OECD Due Diligence Guidance and recent EU Supply-Chain Due Diligence proposals which could come into effect in 2016. This means that up to 880,000 EU firms that use tin, tungsten, tantalum and gold in manufacturing consumer products could be obliged to provide information on steps they have taken to identify and address risks in their supply chains for so-called ‘conflict minerals’.

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