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ThyssenKrupp, Petra Diamonds upgraded on improved outlook

ThyssenKrupp AG and Petra Diamonds Ltd. were among the mining stocks upgraded by analysts in the week ended July 6.

UBS increased its recommendation for ThyssenKrupp to "buy" from "neutral" with an increased price target of €30 per share, up from €24 previously, after the steel giant announced its joint venture with India's Tata Steel Ltd.

The companies recently signed a definitive agreement to combine their European steel businesses on a 50/50 basis to create thyssenkrupp Tata Steel BV, Europe's second largest steel company.

"We think that investors will see the step as the starting signal for unwinding the complex group structure," analysts Carsten Riek and William Vanderpump wrote in a July 4 note. "As such, we believe the market will look to value the parts of [ThyssenKrupp's] business portfolio independently."

According to the Swiss bank, there is about 50% upside to the company's current market capitalization and next year's multiples for ThyssenKrupp indicate that the stock will trade at a 46% discount compared to the past five years.

At a present fair value of €26 apiece, the UBS team also noted that the shares are undervalued and set to go up to €30 each as a result of an estimated €5 billion in synergies that will lift the equity value of ThyssenKrupp's steel business by €2.7 billion.

In a same-day note, RBC Capital Markets upgraded Petra Diamonds to "outperform" from "sector perform" following the injection of US$178 million from a 5-for-8 rights issue.

The move improved annual cash flow by an estimated US$6 million and pushed Petra's balance sheet forward by nearly three years, which analyst Tyler Broda said provides a "crucial de-risking" for the company's balance sheet and a clearer path through the key ramp-up phase of the Cullinan mine in South Africa.

Broda expects the ramp-up of the mine to provide asset flexibility and, as a result, offset variability in diamond prices.

However, he flagged that the company is not yet out of the woods.

"Until caving rates and diamond grades and values are understood at full production rates, there remain inherent risks," the analyst stated. "The diamond market continues to see pressure in smaller quality goods, as fears of synthetics and growing supply have tempered prices. This dynamic will be important to track over the coming quarters, especially as Cullinan prices have lagged in recent tenders."

The stock has a new target price of 65.00 pence per share, 15.00 pence lower than RBC's previous price target, implying 20% upside potential.