- Basic Materials stocks outperformed the STOXX 600 YTD on the back of the “Rare Earth” trade popularity, however price across several Miners appears overextended
- Rich valuation at FY1 PE ratio of 11x, a 30% premium over its 3Y average and price in line with analyst targets for the first time in 10 years leaves limited room for rerating
- Asymmetric downside risk with price at multiyear range highs, and overbought at RSI 74. Put skew at 5Y lows is attractive to add downside leverage via put ratios.
The Basic resources sector has posted a staggering +21% over the last 3M (SXXP +5%) on the back of the popularity of the “Rare Earth” trade and rising broader metal prices. Within the sector Rio Tinto has been the best performer amongst major European miners posting +12% return (SXPP+7%) with price now trading at multiyear range highs.
Price has also been supported by reports of a potential asset-for-equity swap with Chinalco, which could lower the Chinese firm’s 11% stake, freeing capital for buybacks and new deals, however there is a possibility Chinalco could opt to maintain its position.
Valuation appears stretched at current price levels, with a FY1 forward PE ratio of 11x, reflecting a 30% premium over its 5Y average. while the stock now trades in line with analyst ratings for the first time in a decade.
In terms of volatility, 6M Put Skew (90%-100) at 3YPc13 is attractive to add downside leverage on the name, given historically very large price swings. We propose Long 3x Mar26 5000 puts financed by 1x Mar26 5500 puts costing 2.3% of underlying. (Spot ref: 5490, Fut. ref 5440).