Goldman Sachs: Positive Outlook for West African Iron Ore

on Aug 5, 2012
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The global investment banking and securities firm, Goldman Sachs has shared its positive outlook for several West African iron ore producers. Despite the commodity’s recent price drop, Goldman said that it sees potential for a turning trend. The company rated the West African miners a ‘buy’, but also reduced its profit estimates and 12-month price targets for the iron ore producers as the current market trend is not seen to be likely to change in the short term.

West African iron ore producer African Minerals (AMI:LSE) was rated by Goldman Sachs a ‘buy’ with a 12-month price target of 685 pence per share. The investment firm also rated London Mining (LOND:LSE) a ‘buy’ with a 335 pence price target and West African Bellzone Mining (BZM:LSE) a ‘buy’ with a target price of 35 pence per share.
!m[](/uploads/story/231/thumbs/pic1_inline.png)Spot prices for iron ore have recently been trending negative, reaching their lowest point in the year — $119 (£76.5) per tonne. Despite the downside pressure for the commodity, Goldman Sachs sees potential for a changing trend later this year. Fawzi Hanano, an analyst at Goldman, confirmed that iron ore is in a critically weak period, explaining that China’s declining domestic prices are weighing on steel input prices and, accordingly, on steel demand. Yet Hanano’s forecast is that the present state of affairs on the mining market will not last long. According to him, in the near term iron ore prices will remain at their current levels and not fall any further. The analyst expects an upside trend in late 2012 and into 2013, when iron ore pricing will recover.

“While we cannot rule out a further decline in the short term, we believe pricing at this level is not sustainable, as high cost Chinese capacity is likely to swing offline, tightening the market and increasing demand for imported ore, particularly while strong Chinese steel production persists,” Hanano remarked.
Amid a broad-based slowing of industrial activity China’s mills are still pumping steel out at almost record rates. According to recent steel production data, between March and June this year, China produced 60 million tonnes of steel per month. The average production of iron ore in June of 2.007 million tonnes was the second highest ever after April’s 2.019 million tonnes.

Considering this current iron ore market trend and the analyst’s near term forecast for unchanged iron ore prices, Goldman Sachs has lowered its profit estimates for the period 2012 – 2014 as well as the 12-month price targets for several West African iron ore producers, including London Mining, African Minerals, Bellzone Mining, Kumba Iron Ore (KIO:JNB) and Northland Resources (OPOZ:LSE).
“We have reduced our 12-month price targets by 8 per cent – 33 per cent for our iron ore coverage; however, we maintain our ratings and have a preference for the West African iron ore companies delivering production growth in the current price environment, particularly following the sharp share price pullback,” analyst Hanano said.

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