The Rio Tinto Ltd (ASX: RIO) share price and BHP Group Ltd (ASX: BHP) share price have both been rated as sells by the broker UBS.
Both ASX mining shares are among the biggest iron ore miners in the world and they recently gave their quarterly operational updates to tell investors how much resources they dug out of the ground.
UBS rates Rio Tinto and BHP shares as sells
It was reported by the Australian Financial Review that the UBS price target on BHP shares was lowered to $37, down from $44.62.
When a broker talks about a price target, it’s referring to where they believe the share price will be trading, or should be trading, in 12 months from now.
What UBS – a broker – is saying is that they think BHP shares are going to fall around 18% over a year.
UBS also has a sell rating on the iron ore miner Rio Tinto, and decreased the price target on Rio Tinto shares to $95. That would represent a drop of around 19% if it happened.
Weakness ahead for BHP shares?
The AFR reported that the BHP production guidance for FY24 was weaker than what analysts were expecting.
UBS analyst Lachlan Shaw suggested that BHP had higher net debt than expected, and it was also increasing its expenditure – these factors are a “risk” for the BHP dividend.
At the current commodity prices, BHP’s free cash flow yield was about 6% and would be 4% if iron ore prices fell to US$90 per tonne for iron ore.
Why the gloom for Rio Tinto shares?
UBS is concerned about lower dividends from Rio Tinto because the ASX mining share is planning to increase its capital expenditure in the medium-term.
The broker’s thoughts about Rio Tinto was “reinforced by Rio’s downbeat macroeconomic comments, and [we] believe risk/reward is skewed to the downside”, as reported by the newspaper.
Iron ore forecast
A key trigger for the negative changes to the price targets seems to be that UBS has reduced its forecast for the iron ore price by around 14% to US$100 per tonne for FY24.
Final thoughts on Rio Tinto shares and BHP shares
Both miners have done well over the last year, when we add the share price and dividend return together. According to CMC, BHP has delivered a total return of 28% over the past year and Rio Tinto’s total return has been around 28% as well.
I don’t think they’re buys today – for me it makes more sense to invest when iron ore prices are down. If UBS’ predictions about share prices are correct, then that could actually be a smart time to consider investing because of how cyclical the miners are.
