Are our ASX big miners on an earnings upgrade cycle?

Our largest miners may be in a cum-upgrade cycle that could see their share prices keep outperforming for a little longer yet!

We have Brazil to thank for this as the country’s poor management of the COVID-19 pandemic will curtail its iron ore exports.

Australia’s ability to flatten the coronavirus curve is giving the BHP Group Ltd (ASX: BHP) share price, Rio Tinto Limited (ASX: RIO) share price and Fortescue Metals Group Limited (ASX: FMG) share price an advantage.

I reckon these ASX miners are on an earnings upgrade cycle.

The Brazilian advantage

Brazil’s biggest iron ore miner Vale SA told the Australian Financial Review that its mines are running on a skeleton crew and that it’s license to operate is under “extreme pressure” from authorities.

Vale is not only sending home workers who tested positive for the virus, but anyone who had contact with the infected employee.

Meanwhile, the miner was forced to turn to the courts on Friday to keep its Itabira mining hub open after government officials tried to close it on the belief that the hub is a source of infections.

Broker upgrade

The escalating COVID-19 crisis in the Latin American country prompted Goldman Sachs to upgrade its iron ore forecast for 2020.

The broker thinks Vale will only be able to hit the low end of its production guidance in 2020, which will leave the iron ore market short of supply.

“We now expect Vale to sell 311Mt [million tonnes] of iron ore vs. guidance of 310-330Mt and for China steel production to grow by 0.4% to 998Mt but for steel production to peak mid-year and then moderate in 2H,” said the broker.

Iron ore forecasts for 2020 and 2021

Goldman Sachs is now forecasting the price of the steel making ingredient to average US$86 a tonne this year and US$80 a tonne in 2021. That’s about 7% to 8% higher than its original estimate.

What this translates to is a 12% upgrade to Fortescue’s earnings per share (EPS) forecast for both FY21 and FY22. Rio’s FY20 EPS gets boosted by 10% while BHP’s FY21 EPS enjoys an 8% lift.

“We forecast an average FCF [free cash flow] yield of 7-9% for the BHP and RIO over the next 3 years,” said Goldman.

“We think that copper production could disappoint over the next 12-18 months for both stocks, however, capex guidance could positively surprise and FCF should remain very attractive.”

Which ASX miner should you buy?

The broker is recommending BHP and Rio as “buy” but is keeping its “hold” rating on Fortescue after the stock’s big recent surge to a record high.

Goldman’s price target on BHP is $37.80, Rio Tinto $101.10 and Fortescue $12.10 a share.

I am expecting other brokers to be lifting their earnings forecasts on the sector too. Let the ASX miner earnings upgrade cycle begin!

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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