Broker snap: Upside limited for miners

18th May 2009 11:53

The mining sector is down 11% over the last week, adding weight to the growing number of voices suggesting that the sector's revival has been premature.US bank Citigroup has been reviewing the sector and is of the opinion that any good news likely to emerge in the next six months from miners has already been priced in.Meanwhile, analysts at Citi's Australian branch reckon that Rio Tinto shareholders dreaming of a revival of BHP Billiton's bid for Rio as an alternative to the controversial cash-injection deal with Chinese state-owned aluminium producer Chinalco are likely to be disappointed.BHP cannot revive its bid for Rio until November 2009 unless the Rio board recommends such an offer or a rival bidder emerges. Citi believes the Rio board is unlikely to turn to BHP Billiton if the Chinalco deal falls through, and will instead opt for a A$10bn rights issue instead. Stockbroker Exane BNP Paribas has also been sizing up the options open to Rio Tinto and their effect on the share price."The improving sentiment on commodities demand over the past two months, the sharp rebound in Rio Tinto's share price, recent bond issues and continued opposition to the proposed Chinalco transaction from a number of stakeholders, not least from Australian politicians, have all led to a resurgence in market speculation about alternatives to the proposed deal, which would likely include a sizeable rights issue," Exane BNP Paribas said.The broker reckons that a veto from the Australian authorities, which would probably trigger a rights issue, would put Rio Tinto's share price "under significant pressure." The broker has reduced its rating on the stock from "outperform" to "neutral". It has revised its target price to £28, deeming a revised bid from BHP Billiton as possible, but unlikely."Should some revised form of the Chinalco deal be finalised, potentially limiting the dilution for shareholders other than Chinalco, we estimate the additional upside at around 20%. There would be more upside in the event of a new bid by BHP, although the latter may not offer as generous a parity as it did in 2007/2008," the broker said.