Global Iron Ore
Nearing the Summit
A higher for longer iron ore price scenario is our new base case, driven by a slower
unwinding of current tightness through 2021. However, some miners have run ahead of
these expectations, implying high iron ore prices. We downgrade FMG and MIN to
UW and prefer Vale and BHP for iron ore exposure
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September 10, 2020 09:00 PM GMT
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Global Iron Ore
Nearing the Summit
A higher for longer iron ore price scenario is our new base case, driven by a slower
unwinding of current tightness through 2021. However, some miners have run ahead of
these expectations, implying high iron ore prices. We downgrade FMG and MIN to
UW and prefer Vale and BHP for iron ore exposure
Industry View
Australia Materials — Attractive
Europe Metals & Mining — In-Line
Latin America Metals & Mining — No Rating
Vale From To
Price Target US$ US$
CAP .
Price Target Ch$7, Ch$7, BHP
Group Ltd
Price Target A$ A$
Rio Tinto Limited
Price Target A$ A$ Fortescue
Metals Group Ltd. Price Target
A$ A$
Rating Equal-weight Underweight
Mineral Resources Limited
Price Target A$ A$
Rating Equal-weight Underweight
Kumba Iron Ore
Price Target ZAc 30,000 ZAc 38,000
BHP GROUP PLC
Price Target ZAc 36,000 ZAc 37,000
Rio Tinto Plc
Price Target 4,300p 4,250p
Surplus is nearing, but strong China steel output likely to aid iron
ore prices into 2021... Our revised iron ore S/D outlook points to market
surpluses commencing 4QCY20. Further recovery in Vale's shipments
and a seasonal slowdown in China's steel output underpin this return
to surplus, and resulting replenishment of China's port inventories.
However, our expectations of stronger steel production in China (CY20
now at MSe +% yoy to 1,040Mt vs
+% previously), mainly driven by infrastructure spending growth,
pushes out and slows down the buildup of port ore stocks.
Consequently, we raise our 4Q20 and CY21 iron ore price forecasts
(62% Fe fines cfr China basis) by 25% and 10%, respectively, to
US$100/t and US$81/t, but longer term projections remain
unchanged. We also see long-term risks building as the potential
development of Simandou could catalyze a change in the industries'
supply dynamics (see here).
… but Iron Ore equities have run hard. We downgrade FMG &
MIN to join KIO as Underweight. Iron ore equities under our cov-
erage have returned +12% on average since the start of the year (vs
+10% for the Bloomberg World Mining Index). While this perfor-
mance was underwritten by unexpectedly high iron ore prices, we now
argue that some equities have started to imply iron ore prices
>US$100/t through 2025 (DCF-based methodology that solves for
average IO price 2021-25 and assumes LT CY26 nominal price of
US$65/t). Kumba (US$124/t), Mineral Resources (US$117/t) and
Fortescue (US$107/t) stand out as the most stretched. This trans- lates
to a negative risk-reward skew, we believe, driving our down- grade of
the latter two stocks. On the other hand, valuations across larger or
diversified names are more reasonable and ranges between US$48-89/t.
FCF bonanza; Vale and BHP offer superior risk-reward in a more
normalized world. Iron Ore majors would generate an average FCF yield
of ~7% in CY21e on our Base Case (~15% on spot). While valua- tions
appear compelling on these metrics, our relative preference for Vale and
BHP is predicated on the companies' ability to generate attractive FCF
in a scenario where Iron Ore prices revert to a sustain- able level of
~US$70/t (~5% and ~7% in CY21e and CY22e, respec- tively, vs peer
average of ~4% and ~5%, respectively). Although Rio Tinto also screens
well on spot prices (~14% in CY21), we argue that valuation is stretched
on our base case and its more limited portfolio diversification leads to
slightly inferior FCF yields of ~5% (CY21-22e average) in a US$70/t
price environment.
WHAT’S
CHANGED
Contents
5 Investment Thesis in six charts
6 Iron ore equities - valuation in focus
9 Iron ore demand - Strong
13 Iron ore supply - an improving story
15 Iron ore surplus and lower prices from 4Q20
onwards
18 Iron ore equities - Global order of preference
19 Vale and BHP preferred, FMG and MIN move to
UW
22 Iron ore equities - Investment thesis
24 Changes to Estimates
25 Appendix - annual supply-demand model
26 Iron ore equities - Risk Rewards
51 Iron Ore Comps
Investment Thesis in six charts
Exhibit 1:
Iron Ore markets set to return to surplus from 4Q20 onwards
Balance (rhs)* Demand Supply
500 90
450 60
400 30
350 0
Exhibit 2:
Road map back to surplus – key moving parts on quarterly basis (Mtpq)
40
32
30
20
10
0
300 -30
*Balance history are quarterly changes in China's port inventories
Source: WSA, NBS, company data, Mysteel, Morgan Stanley Research estimates (e)
Source: Morgan Stanley Research estimates (e)
Exhibit 3:
Implied prices in equities suggest realization of some of the positive
sentiment around iron ore
Exhibit 4:
Although sustaining spot prices could lead to significant FCF
genera- tion
140
120
100 89 86 88 85
107
117
124
100
Spot ($126/t)
60%
50%
80 71
66
60 48 54
40
20
0
76
69 67 68 63
e LT $65/t
CY26e
nominal)
40%
30%
20%
Vale BHP Ltd BHP Plc RIO Ltd RIO Plc CAP FMG MIN KIOJ
Implied iron ore price: MSe LT prices from CY26 Implied iron ore price: Current spot (real) in perpetuity
Notes: Blue bar shows implied iron ore price assuming spot till CY26 and then MS long term prices from
CY26+. Yellow bar shows implied iron ore price assuming current spot (on a real basis) from CY21 into
perpetuity. Source: Morgan Stanley Research, Refinitiv
10%
0%
BH
P
Ltd
BH
P
Plc
RIO Ltd RIO Plc
FMG
MI
N
KI
OJ
Val
e
CAP
Spot case CY21e FCF yield Base case CY21e FCF Yield
Notes: FCF calculated as operating cash flow less total capex. Source: Morgan Stanley Research,
Refinitiv, Bloomberg
Exhibit 5:
Our positioning views are partly based on FCF generation at US$70/t
iron ore price - the average production cost in the Chinese domestic
market although sustaining spot prices could lead to significant
FCF generation
%
Exhibit 6:
We prefer BHP and Vale, that provide both diversification and upside
200%
150%
100%
%
%
%
%
%
2021e
2022e
Av.
%
Av.
%
50%
0%
-50%
Val
e
BHP Ltd BHP Plc RIO Ltd AAL RIO
PLc
CA
P
FMG MIN KIOJ
%
CA
P
BHP Plc BHP Ltd RIO
Plc
KIO
J
RIO
Ltd
VAL
E
FM
G
MIN
Spot valuation upside/downside MS price target upside/downside
Notes: Spot valuation shown assumes iron ore price is at spot till CY26 and then Morgan Stanley long
16
1
153%
20% 17%
7%
20%
-4%
24%
2%
29% 29%
21%
-1%
6% 11%
-9%
0%
-20% -17%
-30%
140%
MS
(
88
FC
F
Y
ie
ld
U
S$
/t
1Q
19
7.
3%
9.
7%
2Q
19
5.
4% 5.
9%
3Q
19
4Q
19
5.
3% 5.
6%
1Q
20
4.
7% 5.
5%
2Q
20
4.
3%
3.
8%
3Q
20
e
4Q
20
e
4.
3% 4.
8%
1Q
21
e
4.
0%
8.
0%
2Q
21
e
3.
9%
3Q
21
e
5.
4%
4Q
21
e
1.
6%
2.
5%
tig
ht
er
lo
os
er
10
%
6%
3Q
20
e
11
%
7%
C
hi
na
de
m
an
d
12
%
ex
- C
hi
na
de
m
an
d
6%
V
al
e
14
%
6%
O
th
er
su
pl
y
17
%
5%
4Q
20
e
18
%
C
hi
na
de
m
an
d
5%
19
%
ex
- C
hi
na
de
m
an
d
9%
V
al
e
26
%
9%
O
th
er
s
up
ly
49
%
4Q
21
e
20
%
Notes: FCF calculated as operating cash flow less total capex. Source: Morgan Stanley Research esti-
mates
term prices from CY26+. Source: Morgan Stanley Research, Refinitiv
Iron ore
KIOJ
CAP
Vale
Bloomberg World
Mining Index
RIO Plc
RIO
Ltd
BHP
Ltd
BHP
Plc
AAL
Propelled by buoyant prices
Shares of iron ore producers have returned >12% on average YtD, outperforming the Bloomberg World Mining Index by
~200bps underpinned by sharp increases in iron ore prices. While market enthusiasm is warranted given the companies' compelling cash
generation prospects, we worry that some equities are now pricing in iron ore prices of >US$100/tonne (using spot till end of CY25 and LT
nominal price of US$65/t from CY26) with the two clear outliers - and - now starting to look overvalued in our
opinion.
Iron ore equities - valuation in focus
Warranted enthusiasm, but...
Mining equities with sizeable iron ore exposure have returned >12% YtD, outperforming the Bloomberg World Mining Index (+10% YtD) by
~200bps over the period. Fortescue and Minerals Resources have both returned ~70%, given their superior earnings sensitivity to iron ore prices (
Exhibit 41 ).
Exhibit 7:
Equities with sizeable iron ore footprints have outperformed the Bloomberg World Mining Index, with Fortescue and Minerals Resources being clear
outperformers
200 200 MIN
180 180 FMG
160 160
140 140
120 120
100 100
80 80
60 60
40 40
20 20
Jan-2020 Feb-2020 Mar-2020 Apr-2020 May-2020 Jun-2020 Jul-2020 Aug-2020 Sep-2020
Source: Morgan Stanley Research, Refinitiv, Bloomberg
20
20
Y
T
D
p
er
fo
rm
an
ce
, i
nd
ex
ed
to
1
00
High FCF generation and solid balance sheets are sound reasons:
Elevated and buoyant iron ore prices have substantially increased free
cash flow prospects of iron ore equities with spot estimates now yielding
an average of ~20% for CY21 (vs ~8% on our base case). Furthermore,
strong balance sheets and (mostly) strict capital allo- cation frameworks
with compelling shareholder returns have increased the appeal, we
think.
...but some valuations have started to look
stretched
A retracing of the iron ore price could bring fundamental value back
into focus… We conclude from our Supply/Demand analysis that
current tight conditions are likely to ease from 4Q20 onwards.
Exhibit 8: FCF
generation prospects on spot and base case remain healthy for the iron
ore miners for CY21e...
60%
50%
40%
30%
20%
10%
0%
Subsequently, a normalization in iron ore prices could bring back the
market's focus on fundamental valuations. With Fortescue and
Mineral Resources both trading ~40% above our base case, we see
heightened risks of a price correction (see Exhibit 10 ) in these two
equities.
… with most equities trading above our base case: We broadly find a
downside skew to most covered equities in the iron ore space, but
acknowledge that under a scenario where spot sustains (or the market
believes it will sustain) to CY26, there could be further to run for these
equities. Although we attach a low likelihood to that sce- nario given
our base case trajectory for market surplus and the long- term risks that
have been recently introduced with the re-activation of the Simandou
project in Guinea (See here: The last frontier), which will likely create
downside pressure to long term prices.
Exhibit 9:
…which, along with healthy B/S and disciplined capital allocation
pro- vided a strong basis for the recent rally
-
()
()
BHP
Ltd
BH
P
Plc
RIO Ltd RIO Plc FMG MIN KIOJ Vale
CAP
(
) KIOJ FMG MIN RIO BHP Vale CAP AAL
Spot case CY21e FCF yield Base case CY21e FCF Yield
Notes: CY21 spot assumes all currencies and commodities are run at flat spot (not inflated). Source:
Morgan Stanley Research estimates, Refinitiv, Bloomberg
Exhibit 10:
Valuation risks are rising as most stocks are now trading above our
Base Case
CY20e Base case ND/EBITDA CY21e Base case ND/EBITDA
Source: Morgan Stanley Research estimates
Exhibit 11:
We broadly find a downside skew to most covered equities in the iron
ore space, but acknowledge that if spot sustains to CY26, there could
50
%
40
%
30
%
20
%
10
%
0
%
-
10%
-
20%
-
30%
-
40%
-
50%
-
60%
-
40
%
-38%
-13% -8%
-1%
-9% -4%
38%
8%
-50%
10
%
6%
11
%
7%
12
%
6%
14
%
6%
17
%
5%
18
%
5%
19
%
9%
26
%
9%
49
%
20
%
(0
.3
2)
(0
.3
9)
(0
.0
3)
0.
28
0.
09
0.
31
0.
10 0.
17
0.
50
0.
49 0.
54
0.
42 0
.5
6
0.
55
0.
80
0.
78
be
furt
her
to
run
for
the
se
eq
uities
2
0
0
%
1
5
0
%
1
0
0
%
50%
0%
FMG MIN RIO Ltd BHP Ltd AAL RIO Plc BHP Plc Vale CAP KIOJ
Upside to base case Donwside to base case
Source: Morgan Stanley Research estimates, Refinitiv
-50%
Vale BHP Ltd BHP Plc RIO Ltd AAL RIO PLc CAP FMG MIN KIOJ
Spot valuation upside/downside MS price target upside/downside
Source: Morgan Stanley Research estimates, Refinitiv
153%
20% 17%
7%
20%
-4%
24%
2%
29% 29%
21%
-1%
6% 11% 0%
-9%
-20% -17%
-30%
140%
Implied prices tell a similar story, with most equities above our LT
price forecasts: To better illustrate the widening valuation gap between
(some) equity prices and underlying fundamentals, we run an implied
price analysis under two scenarios: (1) One which solves for the iron ore
price to equate our DCF calculation to the current
Exhibit 12:
Implied iron ore price assuming Morgan Stanley long term prices from
CY26.
share price, assuming a switch back to our long term prices in CY26 (see
Exhibit 12 ). (2) In another scenario, we run current iron ore spot through
perpetuity, assuming all other variables are aligned with our base case. We
find that Fortescue, Mineral Resources, and Kumba Iron Ore imply the
highest iron ore price under both scenarios.
Exhibit 13:
Implied iron ore price assuming current spot (on a real basis) into per-
petuity.
140
80
60 48
40
20
0
117
68
124
MSe LT ($65/t)
(CY26e nominal)
140
80
60 54
40
20
71 66 69 67
100
88
76
63
Spot ($126/t)
MSe LT ($65/t)
(CY26e
nominal)
Vale BHP Ltd BHP Plc RIO Ltd RIO Plc CAP FMG MIN KIOJ
Implied iron ore price: MSe LT prices from CY26 Spot MSe
LT
0
Vale BHP
Ltd
BHP Plc RIO Ltd RIO Plc CAP FMG MIN KIOJ
Notes: Implied iron ore price assuming spot till CY26 and then Morgan Stanley long term prices from
CY26+. Source: Morgan Stanley Research, Refinitiv
Implied iron ore price: Current spot (real) in perpetuity Spot MSe LT
Notes: Implied iron ore price assuming current spot (on a real basis) from CY21 into perpetuity. Source:
Morgan Stanley Research, Refinitiv
U
S$
/t
U
S$
/t
120 107 Spot ($126/t) 120
100 89 86 88 85 100
China's steel output to expand 7% in 2H20, but seasonal slowdown ahead
We've upgraded our forecast of China's 2020 crude steel output from +% to +%yoy, on strong demand driven by stimulus. We
expect China's 2H20 production to be +7%yoy, which implies a slowdown from Jul-Aug peak-levels into 4Q20, in line with normal
seasonality. Given China's high blast furnace utilization rates, we believe its recent hot metal output is close to the upper limit, capping
significant further growth in China's iron ore demand.
Iron ore demand - Strong
China's steel output to remain strong, and
higher than we previously expected
Fiscal and monetary stimulus has pushed China's steel demand to new
highs, and has been a key driver of the most recent surge in the iron ore
price, as Vale's constrained supply is slowly recovering.
China's steel mills are producing at unprecedented levels, with Jan-Jul
output at +% yoy, and July output reaching a record of 93Mt
(+% yoy). This is driven by strong momentum in the infrastructure and
property sectors, with infra FAI and new floor space starts up % and
% yoy in July. On the back of the strong rebound in con- struction
activity, machinery sales are also very strong, at +41% yoy in July.
Exhibit 14:
CISA member mills annualized 10-day production (Mt)
15%
10%
5%
0%
-5%
-10%
800
750
700
650
600
550
500
Exhibit 15:
China finished steel inventories: traders + mills (Mt)
40
35
30
25
20
15
Source: Mysteel, Morgan Stanley Research 10
Source: Mysteel, Morgan Stanley Research
%YoY
Annualized
(rhs)
2016 2018
2019
2020 2017
Ja
n-
16
M
ay
-
16
Se
p-
16
Ja
n-
17
M
ay
-
17
Se
p-
17
Ja
n-
18
M
ay
-
18
Se
p-
18
Ja
n-
19
M
ay
-
19
Se
p-
19
Ja
n-
20 M
ay
-
20
Ja
n
F
eb
M
a
r A
p
r M
a
y J
un Ju
l
A
u
g S
ep O
c
t N
o
v D
ec
s hot metal output
el Hot metal Ratio 86%
Quarterly iron dema
84% 500
Europe
82% 400
80% 300
200
78%
100
76%
0% 20
0% 0%
0% -20
0% -40
00
95
90
We revise our forecast for China's finished steel demand growth to
+% in 2020 (vs +1% previously), underpinned by strong growth in
infrastructure FAI (MSe +10%yoy), machinery sales (+15%) and new
property starts (+3%). Given China's weak steel exports (-19% Jan-
Aug yoy), this translates into an outlook for crude steel output growth
of %, to 1,040Mt in 2020. We forecast 2021 output to expand at a
slower rate of +%yoy to 1,047Mt ( Exhibit 21 ).
We expect China's 2H20 steel output to be +7% yoy; despite this being
strong growth, it implies a slowdown from Jul-Aug peak-levels for the
remainder of the year. Although winter production curbs could be less
stringent than in the last couple of years, with the eco- nomic recovery
being prioritized, we expect 4Q20 output to be 3% lower vs 3Q.
Irrespective of winter curbs, China's steel demand and
output typically ease into the winter period as construction activity
slows – on average China's 4Q steel output is % lower vs 3Q (
Exhibit 17 ).
We believe that China's recent hot metal output is close to the upper limit,
given the high blast furnace utilization rates (around 95%), cap- ping
further growth in China's iron ore demand. Due to reduced levels of scrap
consumption – both in EAFs and the integrated route – the iron ore
intensity of steel (hot metal to crude steel output ratio) has crept up (
Exhibit 19 ). Low steel mill profit margins and reduced scrap
availability have impacted scrap consumption. We expect this trend to
gradually revert, which would negatively impact iron ore demand.
Exhibit 16:
China's infrastructure FAI and new property starts by floor space vs
crude steel output (%yoy 3mma)
Exhibit 17:
Seasonal trend in China's crude steel output – Q2 set at 100 for each
year
20%
1
crude steel output infra FAI (rhs) new starts (rhs)
40%
%
105
1
2012
2013
2014
2015
2016
2017
-1
-2
Source: NBS, CEIC, Morgan Stanley Research
Exhibit 18:
China quarterly crude steel output, actual and forecast (Mtpq)
300
% 2018
2019
%
2020 MSe
85 Average
1Q 2Q 3Q 4Q
Source: Morgan Stanley Research
Exhibit 19:
China's crude steel vs hot metal output, actual and forecast (Mtpq)
200
100
-
Source: NBS, Morgan Stanley Research estimates
Source: NBS, Morgan Stanley Research estimates
300 Crude steel Hot metal Ratio 86%
250
84%
200
82%
150
80%
100
50
78%
- 76%
20
12
1Q
19
20
13
2Q
19
3Q
19
20
14
4Q
19
20
15
1Q
20
20
16
2Q
20
20
17
3Q
20
e
4Q
20
e
20
18
1Q
21
e
20
19
2Q
21
e
20
20
3Q
21
e
4Q
21
e
1Q
19
2Q
19
3Q
19
4Q
19
1Q
20
2Q
20
3Q
20
e
4Q
20
e
1Q
21
e
2Q
21
e
3Q
21
e
4Q
21
e
Exhibit 20:
China steel consumption index
Key Drivers & Weightings 2015 2016 2017 2018 2019 1H19 2H19 1H20 2H20e 2020e
(YoY chg)
Res Property (GFA Sold/new start) - 24% -14% 8% 7% 17% 9% 10% 7% -10% 16% 3%
Other Property (GFA Sold/new start) - 15% -12% 0% -5% -2% 0% 2% -2% 2% 0% 1%
Infrastructure (FAI) - 24% 15% 10% 10% 5% 8% 10% 6% 15% 4% 10%
Machinery Sales - 20% -24% 11% 46% 26% 6% 6% 6% 18% 12% 15%
Auto sales - 6% 5% 14% 4% -3% -8% -14% -2% -17% -13% -15%
Ship building - 2% 7% -16% 21% -19% 6% 4% 8% -11% 1% -5%
White goods sales - 2% -5% 2% 16% 3% 1% 0% 2% -13% 3% -5%
Other Industrial (PMI) - 7% % % 2% 1% 0% 0% 0% -2% 2% 0%
Steel Consumption Index % % % % % % % % % %
Source: NBS, Morgan Stanley Research estimates (e)
Exhibit 21:
China steel supply and demand (Mt)
2014 2015 2016 2017 2018 2019 2020e 2021e 2022e 2023e 2024e 2025e
Supply/Demand & Pricing Model:
Crude Steel Production 840 821 825 832 928 993 1,040 1,047 1,046 1,027 997 969
YoY - % % % % % % 7% 5% 1% 0% -2% -3% -3%
Steel Exports 94 112 109 76 70 64 45 54 65 65 65 65
Steel Imports 14 13 13 13 13 12 12 12 12 12 12 12
Net Imports/(Exports) -79 -100 -96 -62 -56 -52 -36 -44 -52 -52 -52 -52
YoY - % 64% 25% -4% -35% -10% -8% -30% 20% 20% 0% 0% 0%
Est Mill + trader Inventory Incr/(Decr) -2 -3 1 -2 0 -1 10
Appt Steel Consump (crude equiv) 742 704 724 769 869 940 992 1,002 992 972 943 914
YoY - % -2% % 3% 6% 13% 8% 5% 1% -1% -2% -3% -3%
Appt Steel Cons (finished steel) 712 676 695 738 834 903 952 962 952 933 905 878
YoY - % -2% -5% 3% 6% 13% 8% 6% 1% -1% -2% -3% -3%
Source: Morgan Stanley Research estimates, NBS
Europe South Korea Japan
Europe South Korea Japan China
Ex-China demand starting to recover
Although the seaborne iron ore market is dominated by China, with
about 75% of demand, we don't fully discount rest of world demand in
this analysis. Europe, Japan and South Korea together account for 18% of
the seaborne iron ore market. Combined crude steel output in these three
markets was down 25% yoy in 2Q20. Iron ore imports by these three
regions really took a hit in late 2Q20, with May-Jun imports down 37%
yoy ( Exhibit 23 ), or down 116Mt on an annualized basis. Much of this lost
demand was redirected to China, but part was
also offset by disrupted supply from smaller producing countries, most
notably South Africa and Canada.
July data shows that steel output from Japan (+% mom) and South Korea
(+%) is picking up again, while there is no recovery in Europe yet (%).
We forecast a gradual recovery in steel output from these markets, with
4Q20 and 4Q21 output up respectively 8% and 24% vs 2Q20 ( Exhibit
22 ). This recovery will partly offset the slowdown we expect from
China in Q420, cushioning the seaborne demand decline.
Exhibit 22:
Crude steel output from Europe, Japan and South Korea, actual and
forecast (Mtpq)
100
80
60
Exhibit 23:
Iron ore imports by Europe, Japan and South Korea, actual (Mtpm)
30
25
20
15
40
20 10
- 5
-
Source: Morgan Stanley Research estimates, WSA
Source: Eurostat, WBMS, Morgan Stanley Research
Exhibit 24:
Iron ore demand from China, Europe, Japan and South Korea, actual
and forecast (Mtpq)
500
400
300
200
100
-
Source: WSA, NBS, Morgan Stanley Research estimates
Europe South Korea Japan
1Q
19
1Q
19
2Q
19
2Q
19
3Q
19
3Q
19
4Q
19
4Q
19
1Q
20
1Q
20
2Q
20
2Q
20
3Q
20
e
3Q
20
e
4Q
20
e
4Q
20
e
1Q
21
e
1Q
21
e
2Q
21
e
2Q
21
e
3Q
21
e
3Q
21
e
4Q
21
e
4Q
21
e
Ja
n-
19
Fe
b-
19
M
ar
-1
9
A
pr
-1
9
M
ay
-1
9
Ju
n-
19
Ju
l-
19
A
ug
-1
9
Se
p-
19
O
ct
-1
9
N
ov
-1
9
D
ec
-1
9
Ja
n-
20
Fe
b-
20
M
ar
-2
0
A
pr
-2
0
M
ay
-2
0
Ju
n-
20
Vale remains the key supply-side variable
We expect seaborne supply to gradually increase (+11% by 4Q21 vs 2Q20), as Vale's production continues to recover, and suspended
capacity is set for resumption next year. In the short-term, we see limited upside from elsewhere though, with Australia's miners
operating close to maximum output.
Iron ore supply - an improving story
Vale on the way up
Vale's supply remains by far the biggest moving part on the supply- side.
After heavy rains and operational issues added to the already comprised
capacity earlier this year, Vale's shipments have found the way up since
mid-May, with the recent tracked shipments at an annu- alized run-rate of
( Exhibit 25 ). Despite the market's fears that Vale's supply
would be affected by Brazil's Covid situation, Vale navigated relatively
unscathed through this, with limited impact to supply. We expect that
Vale will produce 300Mt in 2020, just shy of its guidance of 310-330Mt.
Our forecast implies that Vale will pro- duce 46Mt (+36%) more in 2H20
than in 1H, which will be mainly facil- itated by the improved
performance from its Northern System.
We expect Vale to produce 360Mt in 2021 (+60Mt yoy) in 2021, as
about 44Mtpa of suspended capacity from the Timbopeba, Fábrica,
Vargem Grande and Brucutu operations returns through the year, while
the Northern System runs close to design capacity of 230Mtpa. We are
factoring in seasonal production disruption for Vale of -10Mt qoq in 1Q21,
though not as much as the -19Mt qoq in 1Q20. Although not our base case
at this stage, we do highlight the risk that another very weak 1Q and a
delay in the resumption of suspended capacity could result in Vale
falling short of our 360Mt production forecast for 2021.
Other supply is largely constrained in the
near term
Beyond the returning volumes from Vale, we see limited additional
tonnes from elsewhere in the short to medium term. Australia's
majors have lifted their foot off the pedal, after a strong 2Q20, partly due
to various maintenance programs. The recent annualized ship- ment rate
of the three Australian majors is about 90Mtpa lower vs the average in
June ( Exhibit 19 ). In the near-term we don't see much upside from the
Australian majors, and we expect combined ship- ments from Rio Tinto,
BHP and FMG in both 3Q and 4Q to be 11Mt lower than in 2Q20. For
now, we don't see immediate risks to Australia's from the potentially
tighter and prolonged restrictions on interstate travel for workers. The
majors are relocating most of their staff, who used to fly-in from other
states, to Western Australia.
Elevated iron ore prices over the last years haven't resulted in a
significant restarts of domestic Chinese supply, with run-of-mine
output up % yoy over the Jan-Jul period, and July output down 1% yoy.
We don't see much further growth in China's domestic supply.
Meanwhile, spurred on by the high price and reduced domestic
requirement, India's has overtaken South Africa as the third largest
supplier ore supplier to China. China's imports from India increased 117%
yoy (+) over the Jan-Jul period. As we expect the price ease and
India's domestic ore requirement to recover, this trend is likely to
reverse.
Exhibit 25:
Vale's annualized weekly tracked shipments (Mtpa)
400
300
200
100
6wk moving average
0
Exhibit 26:
Weekly tracked annualized shipments from Rio Tinto, BHP and
FMG (Mtpa)
250
200
150
100
Source: Refinitiv, Morgan Stanley Research
Exhibit 27:
Quarterly iron ore shipments for key producers, actual and forecast
(Mtpq)
50
Source: Refinitiv, Morgan Stanley Research
400
300
200
100
0
China
Samarco
IOCC
CSN
Minas-Rio
Kumba
Fortescue BHP
(Pilbara) Rio
(Pilbara) Vale
Source: Morgan Stanley Research estimates, Company data
6wk moving average
Ja
n-
17
1Q
19
A
pr
-1
7
2Q
19
Ju
l-
17
3Q
19
O
ct
-1
7
4Q
19
Ja
n-
18
1Q
20
A
pr
-1
8
2Q
20
Ju
l-
18
3Q
20
e
O
ct
-1
8
4Q
20
e
Ja
n-
19
1Q
21
e
A
pr
-1
9
2Q
21
e
Ju
l-
19
3Q
21
e
O
ct
-1
9
4Q
21
e
Ja
n-
20
A
pr
-2
0
Ju
l-
20
Ja
n-
17
A
pr
-1
7
Ju
l-
17
O
ct
-1
7
Ja
n-
18
A
pr
-1
8
Ju
l-
18
O
ct
-1
8
Ja
n-
19
A
pr
-1
9
Ju
l-
19
O
ct
-1
9
Ja
n-
20
A
pr
-2
0
Ju
l-
20
tig
ht
er
lo
os
er
Inventories to replenish
Although we lift our price outlook to US$100/t in Q420 and US$81/t in 2021, we still expect the iron ore price to ease from current
highs. As China's demand eases from recent peak levels, and Vale's supply recovers, we expect China's iron ore inventories to recover and
drive the iron ore price gradually lower. Our revised China steel outlook pushes out and slows down the buildup of China's port ore stocks
vs our prior expectations though.
Iron ore surplus and lower prices from
4Q20 onwards
When comparing the key moving parts in supply and demand on a
quarterly basis, we see a fairly balanced market through 3Q20 and a return
to surplus from 4Q20 onwards ( Exhibit 28 ). We expect a 16Mt
surplus in 4Q20, which will expand to 30Mt by 4Q21. The
return to surplus in Q420 will be mainly driven by the seasonal slow-
down in China's demand, while next year Vale's recovery will be the key
driver, as China and ex-China demand dynamics offset each other.
Exhibit 28:
Key demand vs supply and seaborne market balance (Mtpq)
Balance (rhs)* Demand Supply
500 90
Exhibit 29:
Roadmap from 3Q20 to 4Q21; key moving parts on quarterly basis
(Mtpq)
40
32
450 60 30
400 30 20
350 0 10
300 -30 0
*Balance history are quarterly changes in China's port inventories
Source: WSA, NBS, company data, Mysteel, Morgan Stanley Research estimates
Source: Morgan Stanley Research estimates
16
1
1Q
19
2Q
19
3Q
19
4Q
19
1Q
20
2Q
20
3Q
20
e
4Q
20
e
1Q
21
e
2Q
21
e
3Q
21
e
4Q
21
e
3Q
20
C
hi
na
de
m
an
d
ex
- C
hi
na
de
m
an
d
V
al
e O
th
er
su
pl
y
4Q
20
C
hi
na
de
m
an
d
ex
- C
hi
na
de
m
an
d
V
al
e
O
th
er
s
up
ly
4Q
21
port inventories - days of consumption
long-run average port
inventories iron ore price
(RHS)
In our view, China's port inventories perform the balancing function in
the iron ore market. China's eroding port stocks have been a key driver of
the current high iron ore prices, and are like to remain so in the near
future. Indeed, there is a clear relationship between the port stocks and the
iron ore price over the last three years ( Exhibit 32 ). With the market
returning to surplus in 4Q20, port stocks are expected to rise
meaningfully from 4Q20.
Although we've seen a modest rise in port inventories (+) since mid-
June already, the price kept going up. Arguable, the iron ore price was
spurred on by the combination of fears of Covid-related supply
disruptions in Brazil and China's bullish demand sentiment, but there is
also more to the port stocks dynamics. While total port stocks were
rising – as more Brazilian ore is hitting China's ports – invento- ries of
low and medium Fe-grade fines declined, as evidenced by falling
stocks of Australian origin ( Exhibit 31 ). Given China's com- pressed
steel margins, mills prefer low and medium grade Australian ore over
higher quality Brazilian ore from a value-in-use perspective.
This particular tightness in Australian fines – which are closest to the
benchmark – also contributed the surge to US$130/t.
However, nothing is irreplaceable and the iron ore market is a single
market, in which China's steel mills tend to adjust their iron ore blend. Over
a time horizon of several months, we de expect that the correla- tion
between total port inventories and the iron ore price will return.
That said, given our revised outlook for China's steel output, and the
resulting smaller market surplus, inventories will replenish slower than
we previously anticipated. As a result, we now expect the iron ore price
to stay higher for longer, though still see a downward trajec- tory from
current spot. We forecast the iron ore price to average US$100/t in
4Q20, which is in line with typical historical prices at the stock levels we
expect in 4Q20 ( Exhibit 32 ). For 2021, we've lifted our full-year price
forecast by US$10/t to US$83/t, as China's steel output remains strong
next year.
Exhibit 30:
Iron ore port stocks vs price (days of consumption, US$/t)
60 130
Exhibit 31:
Port stocks by origin (Mt)
100
50 110 80
40 90 60
30 70
40
20 50
20
10 30
0
Source: Mysteel, Platts, Morgan Stanley Research
Exhibit 32:
China iron ore ports stocks vs price
Iron ore price ($/t) Weekly points since Jan-17
140
Source: Mysteel, Morgan Stanley Research
115
90
65
40
20 25 30 35 40 45 50 55
China port stocks (days of consumption)
Australia Brazil
Other
Current spot
3Q20
Last 6 quarterly averages
Forecast
4Q20
1Q21
2Q21 3Q21
4Q21
R² =
Ja
n-
16 J
ul
-
16 Ja
n-
17 J
ul
-
17 Ja
n-
18 J
ul
-
18 Ja
n-
19 J
ul
-
19 Ja
n-
20 J
ul
-
20
Ja
n-
16 J
ul
-
16 Ja
n-
17 J
ul
-
17 Ja
n-
18 J
ul
-
18 Ja
n-
19 J
ul
-
19 Ja
n-
20 J
ul
-
20
Source: Morgan Stanley Research estimates, Mysteel, Platts
50th
Percentile
60th
Percentile
70th
Percentile
80th
Percentile
90th
Percentile
iron ore price
Exhibit 33:
Quarterly iron ore forecast (US$/t, 62% Fe fines, cfr China)
140
120
bull
Our bull case of US$120/t in 4Q20 and US$106/t in 2021 is predi-
cated on Vale's ongoing recovery not fully materializing – falling
short of our estimate for 360Mt production in 2021 – and China's steel
output outperforming our expectations of +% growth in 2021. The
bear case of US$64/t reflects a quicker return to marginal cost levels in an
oversupplied market.
100
80
60
40
Source: Morgan Stanley Research estimates, Platts
base
bear
consensus For reference, we also assess our revised price outlook against the iron
ore cost curve ( Exhibit 35 ). With 90th percentile of the cost curve at
US$57/t, our forecast remains well above marginal cost for the
foreseeable future. Our 4Q20 forecast of US$100/t sits almost at the
99th percentile, while our 4Q21 forecast of US$70/t is the 95th percentile.
Iron ore's marginal cost vs price history highlights that the price tends to
gravitate back to marginal cost when market imbal- ances are resolved (
Exhibit 36 ).
Exhibit 34:
Revised iron ore price forecast (US$/t, 62% Fe fines, cfr China basis)
2Q20 3Q20e 4Q20e 1Q21e 2Q21e 3Q21e 4Q21e 2020e 2021e 2022e
Base case 93 118 100 90 85 78 70 100 81 66
$/t vs previous forecast 23 20 10 10 8 3 100 81 66
vs previous forecast 24% 25% 13% 13% 11% 4% 12% 10% 0%
Consensus 98 91 88 85 80 78 93 83 74
Bear case 110 75 70 65 60 60 92 64 59
Bull case 123 120 125 110 100 90 106 106 82
Source: Morgan Stanley Research estimates (e), Consensus Economics
Exhibit 35:
2020 quality-adjusted cost curve for seaborne + China domestic pro-
duction (US$/t, 62% Fe fines, cfr China basis)
200
Exhibit 36:
Iron ore price vs cost history (real $/t)
250
200
250
200
150 150
100 100
50 50
0 0
Source: Wood Mackenzie, Platts, Morgan Stanley Research
0
0 200 400 600 800 1000 1200 1400 1600 1800
Source: Wood Mackenzie, Morgan Stanley Research estimates (e)
175
150
spot price
125
MSe 4Q20 - $100/t
100
75 MSe 4Q21 - $70/t
50 Marginal cost (90th percentile) - $57/t
25
1Q
19
2Q
19
3Q
19
4Q
19
1Q
20
2Q
20
3Q
20
e
4Q
20
e
1Q
21
e
2Q
21
e
3Q
21
e
4Q
21
e
U
S$
/
t
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
Mineral
Resources Kumba Iron Ore
Fortescue
Metals Group
CAP Tinto PlcAnglo American
Plc
BHP Group Ltd. BHP Group Plc Rio Tinto
13%
13%
75%
20%
60%
20%
22%
67%
11%
63%
38%
0%
38%
50%
13%
65%
26%
9%
38%
54%
8%
50%
38%
13%
53%
47%
0%
100%
0%
0%
Street View: Ratings
Buy/Overweight
Hold/Equal-weight
Sell/Underweight
NA
NA
Valuation Multiples at Last Close
FY20/CY20e
P/E
EV/EBITDA
FCF Yield
FY21e/CY21e
P/E
EV/EBITDA
FCF Yield
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
Stock Price Performance
1 Month
3 Month
1 Year
YTD
Iron ore equities - Global order of preference
Exhibit 37:
Order of Preference within the Morgan Stanley global iron ore miners <
Rating Overweight Overweight Overweight Equal-Weight Equal-weight Equal-Weight Equal-weight Underweight Underweight Underweight
Trading Currency USD AUD GBp AUD GBp GBp CLP AUD AUD ZAc
Price Target 1, 1, 4, 7,513 38,
Current Price 1, 1, 4, 7,050 52,
Upside/(Downside) (%) 17% 7% -1% 0% -1% -10% 7% -19% -16% -27%
Market Cap (in USD mm) 58, 135, 113, 118, 31, 102, 1, 40, 3, 10,
Avg Daily Traded Vol (in USD mm)
Morgan Stanley Estimates
FY20/CY20e USD USD USD USD USD USD USD USD AUD ZAR
EBITDA 18,254 22,578 22,578 21,537 8,114 21,537 816 8,312 750 39,207
EPS 2
FY21e/CY21e
EBITDA 16,656 22,818 22,818 19,044 9,365 19,044 630 9,591 1,153 31,940
EPS 3
FY20/CY20e MSe vs. Consensus Mean
EBITDA 10% NA NA 5% 6% 8% 20% NA NA 8%
EPS 12% NA NA 5% 19% 13% 25% NA NA 12%
FY21e/CY21e MSe vs. Consensus Mean
EBITDA -6% 2% 4% -5% -1% -1% 35% 18% 12% 3%
EPS -8% -5% 2% -9% 0% -1% 47% 24% 7% 10%
Implied Multiples on MS Price Target
FY20/CY20e
P/E
EV/EBITDA
FY21e/CY21e
P/E
EV/EBITDA
Source: Morgan Stanley Research, Refinitiv (consensus mean), Morgan Stanley Research estimates. Notes: BHP Group, Fortescue Metals Group and Mineral Resources report on an FY basis, rest are CY; N/A implies
values which are not available; Please note all EPS shown in US$
Majors and diversifieds vs pure-plays
In contrast to the stretched valuations of some pure-plays like Fortescue, Mineral Resources, and Kumba, we see better risk- reward in the
majors, with BHP and Vale preferred. Vale offers exposure to a volume expansion in CY21, and lower costs, on the back of production
restarts, while BHP's diversification and copper exposure put it in good stead. Even under our US$70/t 'reasonable' iron ore scenario, we
find healthy FCF generation and strong balance sheets at both BHP and Vale.
Vale and BHP preferred, FMG and MIN move to
UW
Formidable FCF generation, some majors are
better placed
We find that even under our Base Case price deck, which points to a
declining iron ore price, iron ore names would generate an average FCF
yield of % in CY21. Interestingly, we find that the big market
cap miners have a superior risk-adjusted return profile as they pro- vide a
combination of robust FCF and some diversification (in the case of
BHP). Moreover, solid balance sheets and disciplined capital allocation
frameworks provide a sound basis for boosting cash share- holder returns,
if prices stay higher for longer.
Exhibit 38:
Base Case FCF generation in CY21 shows the larger diversified
players providing preferred exposures
25%
Exhibit 39:
Balance sheet metrics for CY21 remain sound for iron ore miners
20%
15%
10%
5%
0%
MIN FMG
RI
O
RI
O
BH
P
BH
P
20%
AAL KIOJ Vale CAP
x
x
x
x
-
-
-
-41%
AAL CAP BHP Vale MIN FMG RIO KIOJ
Ltd Pl
c
Lt
d
Plc Source: Company data, Morgan Stanley Research Estimates
Source: Company data, Morgan Stanley Research Estimates
9% 9%
6% 6%
7% 8%
5% 5% 6%
ND/EBITDA
(CY21e)
Gearing (CY21e)
21%
14% 15% 14%
9% 12% 6%
C
Y
21
e
B
as
e
C
as
e
FC
F
Y
ie
ld
EBIDTA and FCF Sensitivity, the most in smaller producers, but it
works both ways: Unsurprisingly, the smaller iron ore producers provide
higher leverage to a US$10/t change in the iron ore price in terms of
EBITDA and FCF. Yet, we also argue that those names would
be the most exposed given our view that the risk to the iron ore price is
largely weighted to the downside. As such, we prefer miners that offer
some diversification, where the sensitivity to an iron price is reduced.
Exhibit 40:
CY20 EBITDA sensitivity to a US$10/t iron ore price move
14%
Exhibit 41:
CY21 EBITDA sensitivity to a US$10/t iron ore price move
30% 27%
12%
10%
8%
6%
4%
2%
12%
25%
20%
15%
10%
5%
0%
AAL Val
e
BH
P
RI
O
FM
G
KI
OJ
MI
N
CA
P
0%
AAL BHP RIO KIOJ Vale FMG CAP MIN
Source: Morgan Stanley Research estimates Source: Morgan Stanley Research estimates
Exhibit 42:
CY20 FCF yield sensitivity to a US$10/t iron ore price move
90% 79%
Exhibit 43:
CY21 FCF yield sensitivity to a US$10/t iron ore price move
70%
80%
70%
60%
50%
40%
30%
20%
10%
0%
60%
50%
40%
30%
20%
10%
0%
58%
BHP
Ltd
Vale BHP Plc KIOJ RIO Plc CAP RIO Ltd FMG AAL
MIN
BHP Plc BHP
Ltd
AAL RIO Plc KIOJ RIO Ltd CAP Vale FMG MIN
Source: Morgan Stanley Research estimates Source: Morgan Stanley Research estimates
46%
39%
41%
26% 27% 27%
16%
19%
11%
10%
9%
7%
6%
5%
4% 4%
18%
9% 9% 10% 10%
13%
3% 4% 5%
24%
19% 19%
20%
14%
11%
7%
C
Y
20
F
C
F
Se
ns
iti
vi
ty
C
Y
20
E
B
IT
D
A
Se
ns
iti
vi
ty
C
Y
21
F
C
F
Se
ns
iti
vi
ty
C
Y
21
E
B
IT
D
A
Se
ns
iti
vi
ty
Testing the thesis on a more
'reasonable' iron ore price
In order to test our order of preference in a
lower iron ore environment, we try and work
out a reasonable level where the iron price may
settle post market tightness abating, and after
sufficient inventories are built. We arrive at a
US$70/t level, based on the average cost of
production for domestic Chinese iron ore pro-
duction, which sits at the top end of the global
cost curve.
Majors outperform on a lower iron ore price
scenario: At an iron ore price of US$70/t, we
find that although most iron ore equities
remain FCF positive, the healthiest FCF yields are
found in the big market cap names with BHP and
Vale screening best with the average CY21 and
CY22 FCF generation in the two names at
~5% and ~7%, vs. the peer average of ~4% and
~5%. In addition, when looked at from the
Exhibit 44:
"Reasonable price" level highlighted on 2020 quality-adjusted cost curve for seaborne + China
domestic production (US$/t, 62% Fe fines, cfr China basis)
200
175
150
125
100
75
50
25
0
0 200 400 600 800 1000 1200 1400 1600 1800
Source: Wood Mackenzie, Morgan Stanley Research
Exhibit 45:
FCF yields at iron ore price US$70/t
%
stand-point of risk, we find that in addition to
commodity diversification (mostly in the case of
BHP), these majors also have sound balance sheets
on a US$70/t iron ore price, adding to their
appeal. Further, Vale is the only name that trades at
a significant (38%) discount to its base case (
Exhibit 10 ) due to the Jan 2019
Brumadinho accident, but we think the stock
would re-rate if the company were to reach a
%
%
%
%
%
%
2021e
2022e
Av. %
Av. %
CAP BHP Plc BHP Ltd RIO Plc KIOJ RIO Ltd VALE FMG MIN
possible comprehensive agreement with
Brazilian public prosecutors on the accident —
something we believe may happen in 2H20. In our
view, it makes more sense for Vale and
prosecutors/MG state to reach a final and com-
prehensive settlement that puts the
Brumadinho legal disputes to rest. We think
such a potential outcome could be a win-win for all
involved: for the victims of the accident (., they
receive compensation promptly), for MG state
and prosecutors (., they can show that they got
the company to pay for the negative impact it
caused) and for Vale (., end legal uncertainty
on this matter). In our opinion, the latest petition
may be an effort by MG state/ prosecutors to
help strengthen their position in potential
negotiations.
spot price
"Reasonable price" - $70/t
Marginal cost (90th percentile) - $57/t
FC
F
Y
ie
ld
7.
3%
9.
7%
5.
4% 5.
9%
5.
3% 5.
6%
4.
7% 5.
5%
4.
3%
3.
8%
4.
3% 4.
8%
4.
0%
8.
0%
3.
9%
5.
4%
1.
6%
2.
5%
Source: Morgan Stanley Research estimates
Exhibit 46:
Gearing (ND/ND +E) across coverage at
US$70/t
Company
Gearing (ND/ND+E)
2021e
CAP 23%
MIN 20%
AAL 20%
BHP 18%
FMG 17%
RIO 9%
VALE 7%
KIOJ -30%
Source: Morgan Stanley Research estimates
Iron ore equities - Investment thesis
Vale (, Overweight, PT USD , Carlos De Alba)
We are OW Vale as we think the stock is cheap and we expect one catalyst to unfold in the short-term:
settlement of a possible comprehensive agreement between Vale and the Brazilian public prosecutors on
Brumadinho, which we believe will happen in 2H20. We project Vale to post solid FCF in the coming years, despite
lower iron ore price forecasts and future payouts on the Brumadinho accident, which should allow the company to
return excess cash to shareholders via dividends/buybacks. The stock's risk-reward is skewed to the upside and
valuation looks attractive vs. the historical average.
BHP Group Ltd (, Overweight, PT AUD , Rahul Anand)
BHP's portfolio commodity mix and asset quality stands out among its peers. It owns assets which are low-cost
on respective commodity cost curves, which allows the company to generate FCF yield even in a high stress
scenario. BHP has a strong balance sheet, which gives it flexibility to pursue growth and/or increase cash
shareholder returns. We note the company's 1HFY20 net debt level of US$ is towards the bottom of BHP's
target range of US$12-17bn (after IFRS16 adjustment). Given BHP's relatively attrac- tive commodity mix,
resilient FCF and potential for shareholder returns we are OW.
BHP Group PLC ( Overweight, PT GBP 370, Alain Gabriel)
BHP's portfolio mix and quality stand out among peers. The low-cost position of its assets enables the company
to generate FCF yield even in a stress scenario. It maintains a strong B/S, giving flexibility to pursue growth
and/or increase cash shareholder returns, in particular given the company's net debt target of US$12-17bn (post
IFRS16 adjustment) vs FY20 levels of US$ (pre Lease liability associated with index-linked freight
contracts). Spot FCF yields are comparable to peers, even without contributions from the Petroleum division, thus
implying long-term optionality to a potential oil price recovery. We prefer BHP on a relative basis, given its
attractive commodity mix ex-Iron Ore and free optionality on a potential oil price recovery.
Rio Tinto Limited (, Equal-weight, PT AUD , Rahul Anand)
RIO maintains a robust balance sheet, which gives flexibility to pursue growth and/or increase cash share- holder
returns; however, near-term growth opportunities are scarce. Accretive volume growth is unlikely to accelerate
while cost optimization, notably in iron ore, is facing some operational headwinds. We also lack visibility on the
final operating metrics of the Oyu Tolgoi project, pending a project review that is due to be released during 2H20.
Further increases in capital or any delays to first production or operating cost overrun are possible risks. The stock
is showing downside to our price target at current levels, and we prefer diversified peer BHP.
Rio Tinto PLC (, Equal-weight, PT GBP , Alain Gabriel)
The company maintains a robust balance sheet, with ND/EBITDA at in 2019, giving it flexibility to
pursue growth and/or increase cash shareholder returns. However, near-term levers to drive growth are scarce, in
our view, and we lack visibility on the final operating/investment metrics for Oyu Tolgoi (including
the financial impact of COVID-19), expected later in 2020. This could result in some incremental value leakage.
Aluminium fundamentals remain poor, implying potentially subdued returns in the business ex- Iron Ore.
Fortescue Metals Group Ltd. (, Underweight, PT AUD , Rahul Anand)
Recently FMG has had strong cash generation, but heavy investment in the new Eliwana hub and iron
magnetite project (capex of ~US$ in FY20, ~US$ in FY21) has led to the FCF yield dropping from 19% in
FY19 to ~4% by FY22e. While we forecast iron ore prices to remain elevated through FY20-FY21, we expect
elevated Chinese steel mill margins and low-grade iron ore discounts to persist in the long term. Should Chinese
steel mill profitability be higher than expected, there could be further downside risk to our base case valuation.
With FMG pricing in iron ore >US$100/t, we see valuation being stretched and move UW, and prefer BHP's
diversified commodity exposure.
Mineral Resources Limited (, Underweight, PT AUD , Rahul Anand)
Over the next two years, MIN is increasingly exposed to iron ore (it contributes 65% of EBITDA in FY21e),
benefiting from ramp-up at Koolyanobbing and higher iron ore prices. Earnings from this production
expansion are adversely affected by our declining iron ore price view. The completed Wodgina deal with ALB
(MIN 40%) markedly reduced MIN's net debt. MIN's 40% interest in Kemerton also reduces near-term capex for
hydroxide plants, while accelerating exposure to downstream processing. Despite strength in the mining services
business, with MIN pricing in iron ore >US$100/t, we see valuation being stretched and move to UW, and prefer
BHP's diversified commodity exposure.
CAP (, Equal-weight, PT CLP 7,513, Carlos De Alba)
We are EW CAP shares as we see limited upside to our price target. Our base case assumes that the com- pany
gradually turns around its steel division until 2022, which adds a layer of uncertainty to the invest- ment case.
Anglo American PLC ( Equal-weight, PT GBP 400, Alain Gabriel)
Anglo American has an attractive portfolio mix with exposure to late-cycle end markets. Its assets are
sustainably positioned in the second quartile of the global cost curve, with further optimisation potential to boost
volumes/increase margins. The equity provides superior growth relative to peers, supported by the ramp-up of
Quellaveco. However, operating challenges at Anglo Platinum and an increasingly uncer- tain diamonds recovery
are likely to delay the free cash flow inflection until 2021, we believe. Consequently, spot FCF yield is
inferior to peers in the current year.
Kumba Iron Ore (, Underweight, PT ZAR 38,000 Brian Morgan)
Kumba is a well-run producer of high grade iron ore, with a very high ratio of lump ore which commands a
premium. As a result it achieves amongst the highest price realisation of our listed universe. This compen- sates for a
high mining cost of US$20/t, which is due to the mines' high stripping ratio. The result is a break-even point
of between US$40/t and US$50/t, depending on freight and FX. It enjoys a very strong balance sheet and most
free cash is distributed to shareholders. Our UW rating is premised on Kumba's high valuation. As we've shown,
Kumba is pricing in the highest long-term iron ore price for iron ore pro- ducers we cover.
Changes to Estimates
Exhibit 47:
Changes to BBB and PT
New Old Change (%)
Ticker FX Bear Base Bull PT Bear Base Bull PT Bear Base Bull PT
GBp 1050 1840 3240 1840 610 1840 3470 1840 72% 0% -7% 0%
ZAR 230 400 700 400 130 400 750 400 77% 0% -7% 0%
AUD 23% 4% 7% 6%
GBp 710 1,680 2,680 1,680 720 1,680 2,450 1,680 -1% 0% 9% 0%
ZAR 150 370 580 370 160 360 530 360 -6% 3% 9% 3%
CLP 3,400 7661 10420 7513 3000 7133 10000 7077 13% 7% 4% 6%
AUD 29% 15% 12% 14%
ZAR 150 270 670 380 150 220 670 300 0% 23% 0% 27%
AUD 13% 13% 11% 12%
GBp 2,630 4,250 6,630 4,250 2400 4300 6600 4300 10% -1% 0% -1%
AUD 22% 4% 9% 8%
USD 0% 3% 3% 2%
Source: Morgan Stanley Research
Exhibit 48:
Changes to EBITDA and EPS estimates
New Old Change (%)
EBITDA FX 2020e 2021e 2022e 2023e 2020e 2021e 2022e 2023e 2020e 2021e 2022e 2023e
Anglo American Plc US$mn 8,436 9,647 9,069 9,207 7,927 9,194 9,069 9,207 6% 5% 0% 0%
BHP Plc/Ltd * US$mn 22,509 20,372 18,565 17,841 20,505 18,886 18,565 17,839 10% 8% 0% 0%
CAP . US$mn 816 630 475 412 637 545 478 412 28% 16% -1% 0%
Fortescue Metals Group Ltd.* US$mn 9,699 6,766 3,996 3,278 8,078 5,079 3,986 3,214 20% 33% 0% 2%
Kumba Iron Ore ZARm 39,207 31,940 21,616 22,220 34,209 27,492 21,818 22,415 15% 16% -1% -1%
Mineral Resources Limited* AU$mn 1,087 806 421 232 897 597 419 233 21% 35% 1% 0%
RIO Plc/Ltd US$mn 21,537 19,044 14,766 13,554 19,172 17,257 14,766 13,554 12% 10% 0% 0%
Vale US$mn 18,254 16,656 13,660 12,906 16,470 14,158 13,620 12,906 11% 18% 0% 0%
New Old Change (%)
EPS FX 2020e 2021e 2022e 2023e 2020e 2021e 2022e 2023e 2020e 2021e 2022e 2023e
Anglo American Plc US$/sh 13% 10% 0% 0%
BHP Plc/Ltd * US$/sh 6% 14% 0% 0%
CAP . US$/sh 56% 36% 0% 3%
Fortescue Metals Group Ltd.* US$/sh 25% 49% 0% 3%
Kumba Iron Ore ZARm 16% 19% -1% -1%
Mineral Resources Limited* AU$/sh 32% 78% 7% 2%
RIO US$/sh 17% 16% 0% 0%
Vale US$/ADR 18% 25% 1% 1%
Source: Morgan Stanley Research estimates. * EBTIDA and EPS have been calendarised.
Appendix - annual supply-demand model
Exhibit 49:
Iron ore global supply-demand model
unit 2016 2017 2018 2019 2020e 2021e 2022e 2023e 2024e 2025e 2026e
Global crude steel production Mt 1,626 1,686 1,815 1,869 1,802 1,874 1,917 1,925 1,915 1,908 1,902
YoY growth % % % % % % % % % % % %
China's crude steel production Mt 825 832 928 993 1,040 1,047 1,046 1,027 997 969 940
YoY growth % % % % % % % % % % % %
Global iron ore demand Mt 2,082 2,083 2,149 2,205 2,190 2,241 2,264 2,262 2,244 2,229 2,216
Global iron ore supply Mt 2,144 2,125 2,148 2,199 2,189 2,301 2,307 2,331 2,318 2,317 2,318
Global Balance Mt 62 42 -1 -7 -1 60 42 69 75 88 103
Total seaborne iron ore demand Mt 1,441 1,503 1,500 1,488 1,521 1,542 1,537 1,512 1,487 1,464 1,442
YoY growth % % % % % % % % % % % %
China iron ore import
requirements
Mt 1,025 1,075 1,065 1,071 1,154 1,135 1,114 1,079 1,046 1,017 986
China as % of seaborne market % 71% 72% 71% 72% 76% 74% 72% 71% 70% 69% 68%
Total seaborne iron ore supply Mt 1,463 1,505 1,501 1,480 1,517 1,575 1,570 1,583 1,571 1,567 1,565
YoY growth % % % % % % % % % % % %
Seaborne Balance Mt 22 2 0 -8 -4 34 33 71 85 103 122
price fines cfr US$/t (62%Fe) 58 71 70 93 100 81 66 60 60 63 65
price fines cfr US¢/mtu 94 115 112 151 161 130 106 97 97 101 104
price lump cfr US$/t 68 81 85 110 110 93 79 73 73 76 78
lump/fine differential US$/t
YoY growth (fines) % 5% 22% -2% 34% 7% -19% -19% -9% 0% 4% 4%
YoY growth (lump) % 5% 19% 6% 30% 0% -16% -15% -7% 0% 3% 4%
Fe premium (65 vs 62%Fe) US$/t 6 16 21 11 12 14 13 13 13 13 13
Fe discount (58 vs 62%Fe) US$/t -14 -29 -29 -17 -20 -20 -20 -20 -20 -20 -21
Imports
China Mt 1,025 1,075 1,065 1,071 1,154 1,135 1,114 1,079 1,046 1,017 986
Japan Mt 130 132 124 120 103 118 122 122 121 119 118
Europe Mt 122 122 121 110 90 102 106 109 110 111 112
Production
Rio Tinto Mt 329 330 338 327 331 345 347 349 350 350 350
BHP Mt 263 268 274 272 286 282 279 280 279 279 279
Fortescue Mt 171 169 168 174 176 178 175 180 180 180 180
Vale Mt 349 367 385 308 300 360 380 394 391 388 391
top-3, share of seaborne % 62% 60% 63% 60% 58% 61% 62% 62% 63% 63% 63%
top-3 + FMG, share of
seaborne
% 74% 72% 74% 72% 70% 72% 73% 74% 74% 74% 74%
Source: WBMS,, World Steel Association, Wood Mackenzie, NBS, Eurostat, Company data, Morgan Stanley Research estimates (e)
Iron ore equities - Risk Rewards
US$(++%1%) )
US$(++%%) )
US$
US$(--4477..000%%) )
OW as we think the stock is cheap and we expect one catalyst to unfold in the ST
PRICE TARGET US$ OVERWEIGHT THESIS
Our 2021YE PT is derived using the average of a multiple valuation (50%) and a DCF model (50%). In
the first approach, we use a P/E multiple of , 21% below Vale's 2014-18 historical avg., on our
2022E EPS. The discount is equivalent to 100% of the avg. discount, relative to their historical
multiple, at which British Petroleum and Volkswagen traded after their environmental incidents. In
our DCF model, we use a % WACC and a 0% growth rate.
US$
Consensus Price Target Distribution US$ US$
MS PT
▪ We are OW Vale as we think the stock is
cheap and we expect one catalyst to unfold
in the short-term: settlement of a possible
comprehensive agreement between Vale and
the Brazilian public prosecutors on
Brumadinho, which we believe will happen in
2H20.
▪ We project Vale to post solid FCF in the
Source: Thomson Reuters, Morgan Stanley Research
RISK REWARD CHART
USD
Mean Morgan Stanley
Estimates
coming years, despite lower iron ore price
forecasts and future payouts on the
Brumadinho accident, which should allow
the company to return excess cash to
shareholders via dividends/buybacks.
▪ The stock's risk-reward is skewed to the
upside and valuation looks attractive vs.
historical average.
16
Consensus Rating Distribution
12
8 MS Rating
100%Overweight
0% Equal-weight
0% Underweight
4
0
SEP '19 MAR '20 SEP '20 SEP '21
Key: Historical Stock Performance Current Stock Price Price Target
Source: Thomson Reuters, Morgan Stanley Research
Source: Thomson Reuters, Morgan Stanley Research
Risk Reward Themes
Earnings Quality: Positive
Macroeconomics: Negative
Special Situation: Positive
View descriptions of Risk Rewards Themes, here
BULL CASE US$ BASE CASE US$ BEAR CASE US$
Fe (CIF): 2H20E:$122/t; 2021E:$106/t;bull
case DCF
Demand disruption from the covid-19
outbreak recovers faster than expected, driving
commodity prices higher. Stronger- than-
expected IO demand in China and Europe
drives higher medium to long-term iron ore
prices.
Fe (CIF): 2H20E: $109/t; LT: $81/t; base case
DCF
The global recession driven by the covid-19
outbreak impacts iron ore demand less than
other commodities supported by China steel
production. Strong Chinese steel production
results in a balanced market for 3Q20, but the
recovery in seaborne iron ore shipments lead to a
surplus in 4Q20. S11D fully ramp up and lower
capex needs drive solid FCF generation. We
factor in an additional $2Bn Brumadinho
provision.
Fe (CIF): 2H20E: $93/t; 2021E:$64/t; bear
case DCF
The covid-19 driven global recession lasts longer
than expected negatively impacting demand for
commodities and Chinese steel consumption.
The global slowdown leads to a faster-than-
expected decline in bulk and base metals
demand, negatively impacting commodities
prices. We consider an additional $ in
payments for Brumadinho (maximum fine – .
20% of gross revenues – under the Brazilian
anti- corruption law).
1/5 3 Month
MOST Horizon
BULL BASE BEAR DRIVERS
BULL
US$
BASE
US$
Higher Commodity
Prices Reduced Commodity Prices
BEAR
US$
Lower Iron Ore and Nickel
Volumes Higher Dam Accident
Payment
KEY EARNINGS INPUTS CATALYST CALENDAR
Drivers 2019 2020e 2021e 2022e Date Event Source: Thomson Reuters, Morgan Stanley
Iron ore FOB C1 cash cost ($/t) 28 Oct 2020 Q3 2020 Vale
SA
Earnings Release
Iron ore shipments (Mt) (mm)
Nickel Shipments (Kt) (000s)
Nickel Price ($/lb)
Iron Ore Benchmark Price ($/lb)
INVESTMENT DRIVERS
Vale benefits from low production costs vs. the
industry, supporting above-average margins and
RISKS TO PT/RATING
RISKS TO UPSIDE
China steel output growth surprises to the
MS ESTIMATES VS. CONSENSUS
FY Dec 2020e
cash flow.
Carajas' high quality ore (high in Fe content, low in
contaminants) enables Vale to benefit from quality
premiums.
upside, iron ore prices move higher
Vale re-rates on improved ESG practices
RISKS TO DOWNSIDE
Sales /
Revenue
(US$,
mm)
36,272
29,564 38,002
33,953
China and/or Europe reduces steel
GLOBAL REVENUE EXPOSURE
consumption/production and/or cuts iron ore
imports
Global growth slows down led by China; lower
EBITDA
(US$, mm)
13,085
18,254
16,821
20,139
0-10% APAC, ex Japan, Mainland
global demand for commodities
China and
India
0-10% Europe ex UK
0-10% India
0-10% Japan
0-10% MEA
0-10% North
America
Commodity prices lower than our base case
Vale has pay a large unexpected amount for
Samarco, Brumadinho accidents
OWNERSHIP POSITIONING
Net income
(US$, mm)
6,255
8,389
7,856
9,141
0-10% UK
60-70% Mainland
China
Source: Morgan Stanley Research Estimate
Inst. Owners, % Active %
HF Sector Long/Short Ratio
EPS
(US$)
View explanation of regional hierarchies, here HF Sector Net Exposure 2% Mean Morgan Stanley Estimates
MS ALPHA MODELS
Source: Thomson Reuters, FactSet, Morgan Stanley
Research; 1 is the highest favored Quintile and 5 is the least
favored Quintile
Thomson Reuters; MSPB Content. Includes certain hedge fund
exposures held with MSPB. Information may be inconsistent
with or may not reflect broader market trends. Long/Short
Ratio = Long Exposure / Short exposure. Sector % of Total
Net Exposure = (For a particular sector: Long Exposure - Short
Exposure) / (Across all sectors: Long Exposure – Short
Exposure).
Source: Thomson Reuters, Morgan Stanley Research
Compelling valuation but delayed FCF inflection point keeps us Equal-weight
PRICE TARGET 1,840p EQUAL-WEIGHT THESIS
Our price target is based on a DCF valuation, using a WACC of % and terminal growth rate of 2%
from 2035 onwards.
2,111p
Consensus Price Target Distribution 1, 2,
MS PT
▪ Anglo American has an attractive portfolio
mix with exposure to late-cycle end markets.
Its assets are sustainably positioned in the
second quartile of the global cost curve, with
further optimisation potential to boost
Source: Thomson Reuters, Morgan Stanley Research Mean Morgan Stanley
Estimates
volumes/increase margins.
▪ The equity provides superior growth relative
to peers, supported by the ramp-up
RISK REWARD CHART AND OPTIONS IMPLIED PROBABILITIES (12M)
GBp
3200
of Quellaveco. The shares are trading at a
discount to NAV.
▪ However, operating challenges at Anglo
Platinum and an increasingly uncertain
diamonds recovery are likely to delay
the free cash flow inflection until 2021, we
believe. Consequently, spot FCF yield is
inferior to peers in the current year.
2400
1600
800
Consensus Rating
Distribution
MS Rating
65% Overweight
26% Equal-weight
9% Underweight
Source: Thomson Reuters, Morgan Stanley Research
0
SEP '19 MAR '20 SEP '20 SEP '21
Key: Historical Stock Performance Current Stock Price Price Target
Source: Thomson Reuters, Morgan Stanley Research, Morgan Stanley Institutional Equities Division. The probabilities of our Bull,
Base, and Bear case scenarios playing out were estimated with implied volatility data from the options market as of 09 Sep, 2020.
All figures are approximate risk-neutral probabilities of the stock reaching beyond the scenario price in either three-months’ or one-
years’ time. View explanation of Options Probabilities methodology, here
Risk Reward Themes
Earnings Quality: Positive
Macroeconomics: Positive
View descriptions of Risk Rewards Themes, here
BULL CASE 3,240p BASE CASE 1,840p BEAR CASE 1,050p
Bull case prices, Sirius at NPV
We value the assets on a DCF-based sum of the
parts, using our bull case commodity deck, and
Sirius at NPV.
Base prices, Quellaveco growth project
We value the assets on a DCF-based sum of the
parts, using our base case commodity deck. The
Quellaveco growth project is included in our
base case
Implied valuation as per stress case
scenario
1) Our bear case focuses on implied valuation at
commodity price performance relative to their
respective cost curves in the last two significant
downturns: the GFC and the late 2015 China
growth scare. We apply an average EV/EBITDA
multiple to our calculated EBITDA, 2) Value
destruction due to the Sirius acquisition, 3) no
improvement at DeBeers
3,240p(++%%) ) Prob (>3,240)~%
1,873p
1,840p(--11..7788%%) )
Prob (> 1,840) ~%
1,050p(%%) ) Prob (<1,050)~%
3/5 3 Month
MOST Horizon
KEY EARNINGS INPUTS CATALYST CALENDAR
Drivers 2019 2020e 2021e 2022e Date Event Source: Thomson Reuters, Morgan Stanley
Copper Sales Volume (kt) 642 640 633 702 22 Oct 2020 Q3 2020
Anglo
American PLC Production Report
Copper Price (US$/lb)
Iron Ore Price (US$/t) 93 100 81 66
Iron Ore Sales Volume (mt &
100% basis)
Iron Ore Cash Cost (US$/t)
INVESTMENT DRIVERS
Quellaveco project spending overruns or
completion date slips
RISKS TO PT/RATING
RISKS TO UPSIDE
US$3-4bn efficiency programme Is retained
MS ESTIMATES VS. CONSENSUS
FY Dec 2020e
8,114
Regulatory environment in South Africa
Commodity prices and FX, as well as variability in
operating performance, operating costs and capital
expenditure
Electrification of the automotive drive train
progresses faster than Morgan Stanley's base case
Higher commodity prices
RISKS TO DOWNSIDE
EBITDA
(US$, mn)
EBIT
7,090 9,281
7,971
5,806
GLOBAL REVENUE EXPOSURE
0-10% India
0-10% Japan
AAL's operational performance and financial
discipline are not sustained
Deterioration in the regulatory and investment
(US$, mn)
4,493 6,577
5,327
0-10% Latin
America
environment in South Africa EPS
0-10% MEA
0-10% North America
0-10% UK
10-20% APAC, ex Japan, Mainland
Electrification of the automotive drive train
progresses slower than our base case
OWNERSHIP POSITIONING
(US$)
China and
India 10-20% Europe
ex UK 20-30%
Mainland China
Source: Morgan Stanley Research Estimate View
explanation of regional hierarchies, here
Inst. Owners, % Active %
HF Sector Long/Short Ratio 2x
HF Sector Net Exposure 6%
DPS
(US$)
Mean Morgan Stanley Estimates
MS ALPHA MODELS
Source: Thomson Reuters, FactSet, Morgan Stanley
Research; 1 is the highest favored Quintile and 5 is the least
favored Quintile
Thomson Reuters; MSPB Content. Includes certain hedge fund
exposures held with MSPB. Information may be inconsistent
with or may not reflect broader market trends. Long/Short
Ratio = Long Exposure / Short exposure. Sector % of Total
Net Exposure = (For a particular sector: Long Exposure - Short
Exposure) / (Across all sectors: Long Exposure – Short
Exposure).
Source: Thomson Reuters, Morgan Stanley Research
Compelling valuation but delayed FCF inflection point keeps us Equal-weight
PRICE TARGET ZAc 40,000 EQUAL-WEIGHT THESIS
Our price target is based on a DCF valuation, using a WACC of % and terminal growth rate of 2%
from 2035 onwards.
ZAc 44,274
Consensus Price Target Distribution ZAc 37, ZAc 51,
MS PT
▪ Anglo American has an attractive portfolio
mix with exposure to late-cycle end markets.
Its assets are sustainably positioned in the
second quartile of the global cost curve, with
further optimisation potential to boost
Source: Thomson Reuters, Morgan Stanley Research
RISK REWARD CHART
Mean Morgan Stanley
Estimates
volumes/increase margins.
▪ The equity provides superior growth relative
to peers, supported by the ramp-up
of Quellaveco. The shares are trading at a
discount to NAV.
▪ However, operating challenges at Anglo
ZAc
60000
ZAc 70,000(++%%) ) Platinum and an increasingly uncertain
diamonds recovery are likely to delay
the free cash flow inflection until 2021, we
believe. Consequently, spot FCF yield is
inferior to peers in the current year.
45000
30000
15000
Consensus Rating
Distribution
MS Rating
50% Overweight
50% Equal-weight
0% Underweight
Source: Thomson Reuters, Morgan Stanley Research
0
SEP '19 MAR '20 SEP '20 SEP '21
Key: Historical Stock Performance Current Stock Price Price Target
Source: Thomson Reuters, Morgan Stanley Research
Risk Reward Themes
Earnings Quality: Positive
Macroeconomics: Positive
View descriptions of Risk Rewards Themes, here
BULL CASE ZAc 70,000 BASE CASE ZAc 40,000 BEAR CASE ZAc 23,000
Bull case prices, Sirius at NPV
We value the assets on a DCF-based sum of the
parts, using our bull case commodity deck, and
Sirius at NPV.
Base prices, Quellaveco growth project
We value the assets on a DCF-based sum of the
parts, using our base case commodity deck. The
Quellaveco growth project is included in our
base case.
Implied valuation as per stress case
scenario
1) Our bear case focuses on implied valuation at
commodity price performance relative to their
respective cost curves in the last two significant
downturns: the GFC and the late 2015 China
growth scare. We apply the average EV/EBITDA
multiple to our calculated EBITDA, 2) Value
destruction due to the Sirius acquisition, 3) no
improvement at DeBeers.
ZAc 40,527 ZAc 40,000(--11..3300%%) )
ZAc 23,000(%%) )
KEY EARNINGS INPUTS CATALYST CALENDAR
Drivers 2019 2020e 2021e 2022e Date Event Source: Thomson Reuters, Morgan Stanley
Copper Sales Volume (kt) 642 640 633 702 22 Oct 2020 Q3 2020
Anglo
American PLC Production Report
Copper Price (US$/lb)
Iron Ore Price (US$/t) 93 100 81 66
Iron Ore Sales Volume (mt &
100% basis)
Iron Ore Cash Cost (US$/t)
INVESTMENT DRIVERS
Quellaveco project spending overruns or
completion date slips.
RISKS TO PT/RATING
RISKS TO UPSIDE
US$3-4bn efficiency programme is retained
MS ESTIMATES VS. CONSENSUS
FY Dec 2020e
8,114
Regulatory environment in South Africa
Commodity prices and FX, as well as variability in
operating performance, operating costs and capital
expenditure.
Electrification of the automotive drive train
progresses faster than Morgan Stanley's base case
Higher commodity prices
RISKS TO DOWNSIDE
EBITDA
(US$, mn)
EBIT
7,090 9,281
7,972
5,806
GLOBAL REVENUE EXPOSURE
0-10% India
0-10% Japan
AAL's operational performance and financial
discipline are not sustained
Deterioration in the regulatory and investment
(US$, mn)
4,493 6,577
5,314
0-10% Latin
America
environment in South Africa EPS
0-10% MEA
0-10% North America
0-10% UK
10-20% APAC, ex Japan, Mainland
Electrification of the automotive drive train
progresses slower than our base case
OWNERSHIP POSITIONING
(US$)
China and
India 10-20% Europe
ex UK 20-30%
Mainland China
Source: Morgan Stanley Research Estimate View
explanation of regional hierarchies, here
Inst. Owners, % Active %
HF Sector Long/Short Ratio 2x
HF Sector Net Exposure 6%
DPS
(US$)
Mean Morgan Stanley Estimates
Thomson Reuters; MSPB Content. Includes certain hedge fund
exposures held with MSPB. Information may be inconsistent
with or may not reflect broader market trends. Long/Short
Ratio = Long Exposure / Short exposure. Sector % of Total
Net Exposure = (For a particular sector: Long Exposure - Short
Exposure) / (Across all sectors: Long Exposure – Short
Exposure).
Source: Thomson Reuters, Morgan Stanley Research
We prefer BHP on a relative basis
PRICE TARGET 1,680p OVERWEIGHT THESIS
Our price target of 1,680p is based on a DCF valuation, using a WACC of % and terminal growth
rate of 2% from 2035 onwards. This is below its main peer due to BHPB's exposure to oil production,
where depletion rates are higher.
1,723p
Consensus Price Target Distribution 1, 2,
MS PT
▪ BHP's portfolio mix and quality stand out
among peers. The low-cost position of its
assets enables the company to generate FCF yield
even in a stress scenario.
▪ It maintains a strong B/S, giving flexibility
to pursue growth and/or increase cash
Source: Thomson Reuters, Morgan Stanley Research Mean Morgan Stanley
Estimates
shareholder returns, in particular given the
company's net debt target of US$12-17bn (post
IFRS16 adjustment) vs 1HFY20 levels
RISK REWARD CHART AND OPTIONS IMPLIED PROBABILITIES (12M)
GBp
2400
1800
1200
of US$.
▪ Spot FCF yields are comparable to peers, even
without contributions from the
Petroleum division, thus implying long-term
optionality to a potential oil price recovery.
▪ We prefer BHP on a relative basis, given its
attractive commodity mix ex-Iron Ore and
free optionality on a potential oil price
recovery.
Consensus Rating Distribution
600
MS Rating
50% Overweight
38% Equal-weight
13% Underweight
0
SEP '19 MAR '20 SEP '20 SEP '21
Key: Historical Stock Performance Current Stock Price Price Target
Source: Thomson Reuters, Morgan Stanley Research, Morgan Stanley Institutional Equities Division. The probabilities of our Bull,
Base, and Bear case scenarios playing out were estimated with implied volatility data from the options market as of 09 Sep, 2020.
All figures are approximate risk-neutral probabilities of the stock reaching beyond the scenario price in either three-months’ or one-
years’ time. View explanation of Options Probabilities methodology, here
Source: Thomson Reuters, Morgan Stanley Research
Risk Reward Themes
Earnings Quality: Positive
View descriptions of Risk Rewards Themes, here
BULL CASE 2,680p BASE CASE 1,680p BEAR CASE 710p
Bull prices, reinvestment, DCF valuation
Jansen
Bull case price deck plus 50% of FCF is
reinvested at 20% IRR for 5 years. Jansen Potash
valued using DCF model, rather than at book
value. US$ pre tax savings by FY21.
Base prices, annual investments at
US$
Cost targets achieved or exceeded. Share of
annual investments at US$ for FY2020-22
(excluding exploration). Jansen Potash at book
value. Spence Hypogene and Mad Dog phase II go
ahead. Valuation based on a SOTP with a DCF
for each asset: % WACC, 2% growth.
Samarco included in the SOTP, US$ in
provisions and US$ in fines.
Stress case scenario
Our bear case focuses on implied valuation at
commodity price performance relative to their
respective cost curves in the last two
significant downturns: the GFC and the late
2015 China growth scare. We apply an average
EV/EBITDA multiple to our calculated
EBITDA.
2,680p(++%%) ) Prob (>2,680)~%
1,720p
1,680p(%%) )
Prob (> 1,680) ~%
710p(%) ) Prob (<710)~%
KEY EARNINGS INPUTS CATALYST CALENDAR
Drivers 2020 2021e 2022e 2023e Date Event Source: Thomson Reuters, Morgan Stanley
Iron Ore Price (US$/t) NA
Copper Sales Volume -attributable
(kt) 1,036 999 1,170 NA
INVESTMENT DRIVERS
Growth Projects.
Capital allocation decision.
RISKS TO PT/RATING
RISKS TO UPSIDE
Growth projects (Jansen potash, Escondida
MS ESTIMATES VS. CONSENSUS
FY Jun 2021e
22,395
Commodity prices and FX, as well as variability
in operating performance, operating costs and
capital expenditure.
GLOBAL REVENUE EXPOSURE
growth, Spence hypogene, Olympic Dam)
successfully executed
Better operating performance, lower costs and
capital expenditure
Higher commodity prices
EBITDA
(US$, mn)
EBIT
16,246 26,828
21,684
16,365
0-10% Europe ex UK
0-10% India
0-10% Japan
0-10% Latin America
0-10% North America
10-20% APAC, ex Japan, Mainland
RISKS TO DOWNSIDE
Execution issues at growth projects (Jansen
potash, Escondida growth, Spence hypogene,
Olympic Dam)
Weak operating performance, higher costs and
capital expenditure
(US$, mn)
10,283
Net income
4,986
(US$, mn)
15,440
8,951
8,870
21,559
12,389
China and India
50-60% Mainland China
Lower commodity prices
EPS
Source: Morgan Stanley Research Estimate
View explanation of regional hierarchies, here OWNERSHIP POSITIONING (US$)
MS ALPHA MODELS
Source: Thomson Reuters, FactSet, Morgan Stanley
Research; 1 is the highest favored Quintile and 5 is the least
favored Quintile
Inst. Owners, % Active %
HF Sector Long/Short Ratio 2x
HF Sector Net Exposure 6%
Thomson Reuters; MSPB Content. Includes certain hedge fund
exposures held with MSPB. Information may be inconsistent
with or may not reflect broader market trends. Long/Short
Ratio = Long Exposure / Short exposure. Sector % of Total
Net Exposure = (For a particular sector: Long Exposure - Short
Exposure) / (Across all sectors: Long Exposure – Short
Exposure).
Mean Morgan Stanley Estimates
Source: Thomson Reuters, Morgan Stanley Research
N
A
249249251
Iron Ore Sales Volumes - attributable
(mt)
19 Oct 2020 Q1 2021 BHP Group PLC Operational Review
Iron Ore Cash Cost (US$/t) 25 26 27 NA
Copper Price (US$/lb) NA
1/5 3 Month
MOST Horizon
We prefer BHP on a relative basis
PRICE TARGET ZAc 37,000 OVERWEIGHT THESIS
Our price target of R370 is based on a DCF valuation, using a WACC of % and terminal growth
rate of 2% from 2035 onwards. This is below its main peer due to BHPB's exposure to oil production,
where depletion rates are higher.
ZAc 38,694
Consensus Price Target Distribution ZAc 27, ZAc 45,
MS PT
▪ BHP's portfolio mix and quality stand out
among peers. The low-cost position of its
assets enables the company to generate FCF yield
even in a stress scenario.
▪ It maintains a strong B/S, giving flexibility
to pursue growth and/or increase cash
Source: Thomson Reuters, Morgan Stanley Research
RISK REWARD CHART
ZAc
60000
45000
30000
Mean Morgan Stanley
Estimates
shareholder returns, in particular given the
company's net debt target of US$12-17bn (post
IFRS16 adjustment) vs 1HFY20 levels of
US$.
▪ Spot FCF yields are comparable to peers,
even without contributions from the
Petroleum division, thus implying long-term
optionality to a potential oil price recovery.
▪ We prefer BHP on a relative basis, given
its attractive commodity mix ex-Iron Ore and
free optionality on a potential oil price
recovery.
Consensus Rating Distribution
15000
MS Rating
83% Overweight
17% Equal-weight
0% Underweight
0
SEP '19 MAR '20 SEP '20 SEP '21
Key: Historical Stock Performance Current Stock Price Price Target
Source: Thomson Reuters, Morgan Stanley Research
Source: Thomson Reuters, Morgan Stanley Research
Risk Reward Themes
Earnings Quality: Positive
View descriptions of Risk Rewards Themes, here
BULL CASE ZAc 58,000 BASE CASE ZAc 37,000 BEAR CASE ZAc 15,000
Bull prices, reinvestment, DCF valuation
Jansen
Bull case price deck plus 50% of FCF is
reinvested at 20% IRR for 5 years. Jansen Potash
valued using DCF model rather than at book
value. US$ pre tax savings by FY21.
Base prices, annual investments at
US$
Cost targets achieved or exceeded. Share of
annual investments at US$ for FY2020-22
(excluding exploration). Jansen Potash at book
value. Spence Hypogene and Mad Dog phase II go
ahead. Valuation based on a SOTP with a DCF
for each asset: % WACC, 2% growth.
Samarco included in the SOTP, US$ in
provisions and US$ in fines.
Stress case scenario
Our bear case focuses on implied valuation at
commodity price performance relative to their
respective cost curves in the last two
significant downturns: the GFC and the late
2015 China growth scare. We apply average
EV/EBITDA multiple to our calculated
EBITDA.
ZAc 58,000(++%%) )
ZAc 37,110 ZAc 37,000(%%) )
ZAc 15,000(%%) )
KEY EARNINGS INPUTS CATALYST CALENDAR
Drivers 2020 2021e 2022e 2023e Date Event Source: Thomson Reuters, Morgan Stanley
Iron Ore Price (US$/t) NA
Copper Sales Volume -attributable
(kt) 1,036 999 1,170 NA
INVESTMENT DRIVERS
Growth Projects.
Capital allocation decision.
RISKS TO PT/RATING
RISKS TO UPSIDE
Growth projects (Jansen potash, Escondida
MS ESTIMATES VS. CONSENSUS
FY Jun 2021e
22,395
Commodity prices and FX, as well as variability
in operating performance, operating costs and
capital expenditure.
GLOBAL REVENUE EXPOSURE
growth, Spence hypogene, Olympic Dam)
successfully executed
Better operating performance, lower costs and
capital expenditure
Higher commodity prices
EBITDA
(US$, mn)
EBIT
16,246 26,828
21,375
16,365
0-10% Europe ex UK
0-10% India
0-10% Japan
0-10% Latin America
0-10% North America
10-20% APAC, ex Japan, Mainland
RISKS TO DOWNSIDE
Execution issues at growth projects (Jansen
potash, Escondida growth, Spence hypogene,
Olympic Dam)
Weak operating performance, higher costs and
capital expenditure
(US$, mn)
10,283
EPS
(US$)
15,034
21,559
China and India
50-60% Mainland China
Lower commodity prices
DPS
Source: Morgan Stanley Research Estimate
View explanation of regional hierarchies, here OWNERSHIP POSITIONING
Inst. Owners, % Active %
(US$)
HF Sector Long/Short Ratio 2x
HF Sector Net Exposure 6%
Thomson Reuters; MSPB Content. Includes certain hedge fund
exposures held with MSPB. Information may be inconsistent
with or may not reflect broader market trends. Long/Short
Ratio = Long Exposure / Short exposure. Sector % of Total
Net Exposure = (For a particular sector: Long Exposure - Short
Exposure) / (Across all sectors: Long Exposure – Short
Exposure).
Mean Morgan Stanley Estimates
Source: Thomson Reuters, Morgan Stanley Research
N
A
249249251
Iron Ore Sales Volumes - attributable
(mt)
19 Oct 2020 Q1 2021 BHP Group PLC Operational Review
Iron Ore Cash Cost (US$/t) 25 26 27 NA
Copper Price (US$/lb) NA
Spot valuation looks attractive, yet it reflects supernormal iron ore profits
PRICE TARGET 4,250p EQUAL-WEIGHT THESIS
Metals and mining companies have a high degree of earnings volatility, due to commodity price
fluctuations and financial leverage. This leads to low reliability of one-year forward earnings (and
multiples); hence, we view DCF as the best valuation approach. Our 4,250p PT assumes a WACC of
~9% and terminal growth rate of % from 2035.
4,716p
Consensus Price Target Distribution 3, 6,
MS PT
▪ The valuation looks attractive, with 2020e
spot FCF yield and EV/EBITDA at a discount
to the historical average, yet this reflects
above-normal profits in iron ore.
▪ The company maintains a robust balance
sheet, with ND/EBITDA at in 2019,
giving it flexibility to pursue growth and/or
Source: Thomson Reuters, Morgan Stanley Research Mean Morgan Stanley Estimates
increase cash shareholder returns.
▪ However, near-term levers to drive growth
are scarce, in our view, and we lack visibility
RISK REWARD CHART AND OPTIONS IMPLIED PROBABILITIES (12M)
GBp
6000
4500
on the final operating/investment metrics for
Oyu Tolgoi (including the financial impact of
COVID-19), expected later in 2020. This could
result in some incremental value leakage.
▪ Aluminium fundamentals remain poor,
implying potentially subdued returns in the
business ex-Iron Ore.
Consensus Rating Distribution
3000
1500 MS Rating
38% Overweight
50% Equal-weight
13% Underweight
Source: Thomson Reuters, Morgan Stanley Research
0
SEP '19 MAR '20 SEP '20 SEP '21
Key: Historical Stock Performance Current Stock Price Price Target
Source: Thomson Reuters, Morgan Stanley Research, Morgan Stanley Institutional Equities Division. The probabilities of our Bull,
Base, and Bear case scenarios playing out were estimated with implied volatility data from the options market as of 09 Sep, 2020.
All figures are approximate risk-neutral probabilities of the stock reaching beyond the scenario price in either three-months’ or one-
years’ time. View explanation of Options Probabilities methodology, here
Risk Reward Themes
Earnings Quality: Positive
Macroeconomics: Negative
View descriptions of Risk Rewards Themes, here
BULL CASE 6,630p BASE CASE 4,250p BEAR CASE 2,630p
Bull prices, recovery in Ali margins,
reinvestment
Bull case price deck (ex-Al) + full recovery in
aluminium margins to 40% and US$ is
reinvested at 20% IRR for 5 years.
Base prices, 70% total dividend payout
Australian Iron Ore volumes shipment of
~329Mt (100% basis) in 2020. WAIO FOB
operating costs (excluding royalties) at
US$ in 2020 and US$ for 2021. We
assume US$ of annual capex
2020-22 and ~70% total dividend payout ratio
2020-22. We use DCF to value each division,
including ~9% WACC and 2% long- term
growth.
Implied valuation at stress case scenario
Our bear case focuses on implied valuation at
commodity price performance relative to their
respective cost curves in the last two
significant downturns: the GFC and the late
2015 China growth scare. We apply average
EV/EBITDA multiple to our calculated
EBITDA.
6,630p(++%1%) ) Prob (>6,630)~%
4,790p
4,250p(--1111..277%%) )
Prob (> 4,250) ~%
2,630p(%%) ) Prob (<2,630)~%
KEY EARNINGS INPUTS CATALYST CALENDAR
Drivers 2019 2020e 2021e 2022e Date Event Source: Thomson Reuters, Morgan Stanley
WAIO Shipments 327 329 345 347 15 Oct 2020 Q3 2020 Rio Tinto PLC Operations Review
Iron Ore Price (US$/t) 93 100 81 66
24 Feb 2021 -
Full Year 2020 Rio Tinto PLC Earnings Release
INVESTMENT DRIVERS
Oyu Tolgoi
Performance at Iron Ore business
RISKS TO PT/RATING
RISKS TO UPSIDE
Final operating/investment metrics for Oyu
MS ESTIMATES VS. CONSENSUS
FY Dec 2021e
19,044
Commodity prices and FX, as well as variability
in operating performance, operating costs and
capital expenditure.
GLOBAL REVENUE EXPOSURE
Tolgoi better vrs our base case
Iron Ore volumes and/or cost performance
better than our estimation
Higher commodity prices
RISKS TO DOWNSIDE
EBITDA
(US$, mn)
Net
income
14,921 23,809
19,374
8,792
0-10% Europe ex
UK
0-10% Japan
0-10% Latin
America
Further increase in spending at Oyu Tolgoi or any
delays to first production or opex overrun
Renewed operating challenges in the IO
(US$, mn)
5,979 12,573
8,892
0-10% UK
APAC, ex Japan,
Mainland China and
India
10-20% North America
50-60% Mainland China
business, which could impact volumes and/or cost
performance
Lower commodity prices
OWNERSHIP POSITIONING
EPS
(US$)
Source: Morgan Stanley Research Estimate View
explanation of regional hierarchies, here Inst. Owners, % Active %
HF Sector Long/Short Ratio 2x
DPS
(US$)
MS ALPHA MODELS HF Sector Net Exposure 6% Mean Morgan Stanley Estimates
Source: Thomson Reuters, FactSet, Morgan Stanley
Research; 1 is the highest favored Quintile and 5 is the least
favored Quintile
Thomson Reuters; MSPB Content. Includes certain hedge fund
exposures held with MSPB. Information may be inconsistent
with or may not reflect broader market trends. Long/Short
Ratio = Long Exposure / Short exposure. Sector % of Total
Net Exposure = (For a particular sector: Long Exposure - Short
Exposure) / (Across all sectors: Long Exposure – Short
Exposure).
Source: Thomson Reuters, Morgan Stanley Research
2/5 3 Month
MOST Horizon
10-
20%
01 Mar 2021
WAIO Operating Cost (US$/t)
Copper production - Mined (kt) 577 516 574 631
Cu Price (US$/lb)
EW on limited upside to our price target.
PRICE TARGET Ch$7, EQUAL-WEIGHT THESIS
Our price target is derived using the avg. of a multiple valuation (50%) and a DCF model (50%). In
the first approach, we use an EV/EBITDA multiple of on our 2022e EBITDA. The multiple is 1/2
SD below the historical average, which we believe is appropriate given the higher iron ore price
forecast in 2022 relative to our LT forecast. In our DCF approach, we use a WACC of % and 2%
growth rate.
Ch$7,
▪ We are EW CAP shares as we see limited
upside to our price target.
▪ Our base case assumes that the company
gradually turns around its steel division
until 2022, which adds a layer of uncertainty to
the investment case.
Consensus Price Target Distribution Ch$5,
MS
PT
Ch$9,
Source: Thomson Reuters, Morgan Stanley Research
RISK REWARD CHART
Mean Morgan Stanley
Estimates
Consensus Rating
Distribution
MS Rating
63% Overweight
38% Equal-weight
0% Underweight
CLP Source: Thomson Reuters, Morgan Stanley Research
Ch$10,(++%%) )
10000
7500
5000
Ch$7, Ch$7,(++44..200%%) )
Risk Reward Themes
Macroeconomics: Positive
Pricing Power: Positive
Self-help: Negative
View descriptions of Risk Rewards Themes, here
2500 Ch$3,(--5522..844%%) )
0
SEP '19 MAR '20 SEP '20 SEP '21
Key: Historical Stock Performance Current Stock Price Price Target
Source: Thomson Reuters, Morgan Stanley Research
BULL CASE Ch$10, BASE CASE Ch$7, BEAR CASE Ch$3,
Fe Price (CIF): 2021: $106/t; bull case DCF
Demand disruption from the COVID-19
outbreak recovers faster than expected, driving
commodity prices higher. Stronger- than-
expected IO demand in China and Europe drives
higher medium to long-term iron ore prices.
The company delivers more cost reductions in
both iron ore and steel divisions.
Fe Price (CIF): 2021: $81/t; base case DCF
The global recession driven by the COVID-19
outbreak impacts iron ore demand less than
other commodities supported by China steel
production. While Chinese steel production
increases in 2H20, seaborne supply disruptions
easing into 2H20 lead to a decline in IO price
($100 4Q20e vs $118 3Q20e). Iron ore market
returns to surplus from 2021 onwards. The
company does not turn around its steel division
until 2022 and profitability remains low
thereafter.
Fe Price (CIF): 2021: $64/t; bear case DCF
The COVID-19 driven global recession lasts
longer than expected negatively impacting
demand for commodities and Chinese steel
consumption. The global slowdown leads to a
faster-than-expected decline in bulk and base
metals demand, negatively impacting
commodities prices.
BULL BASE BEAR DRIVERS
BULL Ch$10,
BASE Ch$7,
1,
Better Steel Results
Stronger Fe Markets / Higher IO Margins
BEAR
Ch$3,
3,
Lower Steel Margins
Weaker Fe Markets / Lower IO Margins
KEY EARNINGS INPUTS CATALYST CALENDAR
Drivers 2019 2020e 2021e 2022e Date Event Source: Thomson Reuters, Morgan Stanley
Realized iron ore price per tonne
(US$)
05 Nov 2020 -
Q3 2020 Cap SA Earnings
Release 09 Nov 2020
Iron ore cash cost per tonne (US$)
Iron ore shipments (Kt) 9,285 16,535 16,750 16,750
Steel EBITDA/t (US$) () () () ()
Steel Processing EBITDA/t (US$)
INVESTMENT DRIVERS
Ability to increase low cost iron ore capacity and
monetize the company's reserves and resources
Ability to turn the steel division into a
RISKS TO PT/RATING
RISKS TO UPSIDE
CAP monetizes its infrastructure assets Iron
ore prices overshoot our assumptions
MS ESTIMATES VS. CONSENSUS
FY Dec 2020e
Sales /
competitive business on a sustainable basis.
Monetization of the company's infrastructure
assets
GLOBAL REVENUE EXPOSURE
RISKS TO DOWNSIDE
Complication to restart operations at CAP's
Guacolda port
Challenges in the steel business' profitability
Revenue
(US$, mm)
EBITDA
2,210 2,426
2,240
0-10% Europe ex
UK
0-10% India
0-10% Japan
0-10% Latin
America
0-10% MEA
OWNERSHIP POSITIONING
Inst. Owners, % Active %
Source: Thomson Reuters, Morgan Stanley Research
(US$, mm)
624 816
683
Net income
264
Note: There are not sufficient brokers supplying
0-10% North America
0-10% UK
APAC, ex Japan,
Mainland China and
India
70-80% Mainland China
(US$,
mm)
EPS
consensus data for this metric
Source: Morgan Stanley Research Estimate View
explanation of regional hierarchies, here
(US$) Note: There are not sufficient brokers
supplying consensus data for this metric
Mean Morgan Stanley Estimates
Source: Thomson Reuters, Morgan Stanley Research
10-
20%
A$(++%1%) ) Prob (>)~%
A$(++77..266%%) )
A$
Prob (> ) ~%
A$(%%) ) Prob (<)~%
We like BHP's portfolio mix
PRICE TARGET A$ OVERWEIGHT THESIS
DCF-based sum of the parts, probabiity-weighted (60% base, 20% bull, 20% bear - skew reflects
spot prices in line with our forecasts).
We use life-of-mine DCF analysis for active mines and nominal values for undeveloped
projects. Scenario analysis generates bull and bear case valuations comprisinh several
components including variations in: commodity prices, FX forecasts and production levels.
% WACC ( beta, % CoD, 10% CoE).
A$
Consensus Price Target Distribution A$ A$
MS PT
▪ BHP's portfolio mix and quality stand out
among its peers. The low-cost position of
BHP's assets enables the company to generate
FCF yield even in a stress scenario.
▪ It maintains a strong balance sheet, giving
flexibility to pursue growth and/or increase
cash shareholder returns, in particular given the
company's net debt target of US$12- 17bn (after
IFRS16 adjustment) vs. 1HFY20
Source: Thomson Reuters, Morgan Stanley Research Mean Morgan Stanley Estimates
levels of US$.
▪ Given BHP's relatively attractive
commodity mix, resilient FCF and potential
RISK REWARD CHART AND OPTIONS IMPLIED PROBABILITIES (12M) for shareholder returns we are OW.
AUD
80
Consensus Rating
Distribution
MS Rating
53% Overweight
47% Equal-weight
0% Underweight
60 Source: Thomson Reuters, Morgan Stanley Research
40 Risk Reward Themes
Earnings Quality: Positive
Macroeconomics: Negative
20
View descriptions of Risk Rewards Themes, here
0
SEP '19 MAR '20 SEP '20 SEP '21
Key: Historical Stock Performance Current Stock Price Price Target
Source: Thomson Reuters, Morgan Stanley Research, Morgan Stanley Institutional Equities Division. The probabilities of our Bull,
Base, and Bear case scenarios playing out were estimated with implied volatility data from the options market as of 09 Sep, 2020.
All figures are approximate risk-neutral probabilities of the stock reaching beyond the scenario price in either three-months’ or one-
years’ time. View explanation of Options Probabilities methodology, here
BULL CASE A$ BASE CASE A$ BEAR CASE A$
Bull case prices and multiple expansion
Bull case commodity and currency forecasts,
next-12-month EV/EBITDA multiple expansion,
and a lower WACC.
Base case prices and production profile
Base case commodity and currency forecasts.
Production and costs are broadly in line with
guidance.
Bear case prices, multiple contraction
Bear case commodity and currency forecasts,
next-12-month EV/EBITDA multiple
contraction, and a higher WACC.
N
A
249249251
Iron Ore Sales Volumes - attributable
(mt)
2/5 3 Month
MOST Horizon
KEY EARNINGS INPUTS
Drivers 2020 2021e 2022e 2023e
Iron Ore Price (US$/t) NA
Copper Sales Volume -attributable
(kt) 1,036 999 1,170 NA
INVESTMENT DRIVERS
Commodity prices, currency, and costs
RISKS TO PT/RATING
RISKS TO UPSIDE
Stronger-than-expected commodity prices or a
MS ESTIMATES VS. CONSENSUS
FY Jun 2021e
GLOBAL REVENUE EXPOSURE
0-10% Europe ex UK
depreciation in the AUDUSD.
Stronger-than-expected macroeconomic
variables, such as China's steel consumption
Sales /
Revenue
(US$,
mn)
42,535
37,627 47,903
41,879
0-10% India
0-10% Japan
ahead of our base case forecasts.
0-10% Latin
America
RISKS TO
DOWNSIDE
22,818
0-10% North America Project execution, especially for Escondida and
EBIT
D
A
18,435 26,828
10-20% APAC, ex Japan, Mainland China and
India
Olympic Dam, and Jansen potash (FID by 2021). (US$, mn)
Operating challenges in the iron ore business,
22,431
50-60% Mainland China
Source: Morgan Stanley Research Estimate View
explanation of regional hierarchies, here
which could affect volumes and/or cost
performance. EPS
(US$)
OWNERSHIP POSITIONING
MS ALPHA MODELS
Source: Thomson Reuters, FactSet, Morgan Stanley
Research; 1 is the highest favored Quintile and 5 is the least
favored Quintile
Inst. Owners, % Active %
Source: Thomson Reuters, Morgan Stanley Research
ROE
(%)
DPS
(US$)
Mean Morgan Stanley Estimates
Source: Thomson Reuters, Morgan Stanley Research
Iron Ore Cash Cost (US$/t) 25 26 27 NA
Copper Price (US$/lb) NA
Disciplined capital allocation with limited near-term growth
PRICE TARGET A$ EQUAL-WEIGHT THESIS
DCF-based sum-of-the parts, probability-weighted (bull 20%, base 60%, bear 20% - balance reflects
spot prices in line with our forecasts).
Key DCF assumptions: WACC % (CoD %, CoE 10%, beta ).
A$
Consensus Price Target Distribution A$ A$
MS PT
▪ The company maintains a robust balance
sheet, giving flexibility to pursue growth
and/or increase cash shareholder retur
