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Goldman Sachs analysts upgrade 3 mining giants amid improved sector outlook

Goldman Sachs turned positive on the mining sector, lifting its view on the industry to attractive from neutral, and on March 14 upgraded global mining giants Antofagasta PLC, BHP Billiton Group and Anglo American PLC.

"Miners are on their strongest footing for many years," Goldman Sachs said, highlighting a robust commodity outlook as the rest of the world's growth offset "slightly softer" growth in China. The firm further said current spot prices' sustainability should be enough to warrant a positive view on mining equities, rebutting beliefs that the sector needs a period of higher commodity prices for an improved outlook.

The companies are generating double-digit free cash flow yields at current prices, and most have repaired their balance sheets. While capital expenditures are expected to increase, significant free cash flow will still lift investor returns, and higher CapEx could contribute to cost curves and improve marginal cost support.

Goldman Sachs raised Antofagasta and BHP Billiton to "neutral" from "sell" and Anglo American to "buy" from "neutral." Nyrstar NV was also upgraded to "neutral," while "buy" ratings were reiterated for Glencore PLC, KAZ Minerals PLC, Vedanta Resources PLC and First Quantum Minerals Ltd.

Antofagasta received two more upgrades in the week to March 16, with Canaccord Genuity raising the miner to "buy" from "hold" and Deutsche Bank upping the company to a "hold" rating from the previous "sell" recommendation.

Canaccord Genuity said March 15 that Antofagasta overtook some of its peers in terms of shareholder returns and capital-oriented growth plans. While Antofagasta initially pegged a 35% payout ratio, Canaccord Genuity sees the miner's cash returns in 2017 as a significant shift in its capital allocation process.

Antofagasta recently declared a final dividend of 40.6 U.S. cents per share for a total dividend of 50.9 cents per share for 2017, a 176.6% increase over the previous year, after attributable profit surged to US$750.6 million, from US$158.0 million in 2016.

Deutsche Bank's March 15 upgrade of the miner comes on the back of improved valuation at current share levels.

In the gold space, RBC Dominion Securities lifted Barrick Gold Corp. to "outperform" from "sector perform" but downgraded Newmont Mining Corp. to "underperform" from "sector perform."

RBC said in a March 12 note that the recent selloff of Barrick shares served as an attractive entry point for investors, adding that the miner's higher cost guidance and expected decline in production are already priced into its shares and relative valuation.

RBC sees Newmont's shares as fairly valued compared to senior peers, indicating a modest relative return to a reduced target price of US$43.00 per share from the previous US$45.00 per share. RBC said alternative investments in senior gold producers could offer better growth.

Randgold Resources Ltd. also received an upgrade from Canaccord Genuity, which raised the miner's rating to "buy" from "hold."

Canaccord Genuity said the recent pullback in Randgold shares presented a good buying opportunity, as the firm estimates an 8% rise in the miner's EBITDA through 2020 driven by a lower cost guidance.

Another upgraded gold major is Klondex Mines Ltd., with Clarus Securities tagging the company as "speculative buy," compared to the previous "sell" recommendation.

While the miner's financial results in the last quarter of 2017 stood lower than estimates, Clarus Securities said March 16 that the company's focus on its portfolio in Nevada and production ramp-up at the Hollister mine in the state will pave the way for better operational execution this year.

Elsewhere, JPMorgan raised Century Aluminum Co.'s rating to "overweight" from "neutral" amid the U.S. government's new tariff policies, covering a 10% levy on global aluminum imports.

JPMorgan said March 14 that Century Aluminum is poised to benefit from higher aluminum prices, especially with the company resuming production at three facilities in Hawesville, Ky., that have been shuttered since 2015.

U.S. Steel Corp. saw a downgrade from Vertical Group, which said the shift in steel consumers' sentiment could mean the new U.S. tariffs' upside on hot-rolled coil prices has played out.

Analyst Gordon Johnson said "there was too much good news" priced into U.S. Steel's former valuation, adding that the company's stock could end up in worse shape after the tariffs take effect. Vertical Group on March 13 cut U.S. Steel's rating to "sell" from "hold."