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JPMorgan Cazenove lists top picks, rating changes for 3 diversified majors

JPMorgan Cazenove on Dec. 14 reported a string of rating changes for various mining companies, including giants Glencore Plc, Rio Tinto and BHP Billiton Group, and listed its most and least preferred picks in the sector.

Glencore was upgraded to "overweight," with its target price increased from 320 pence per share to 450 pence per share. JPMorgan noted that the company generates a better free cash flow yield compared to Rio Tinto and BHP Billiton and, stripping out its marketing business, is the second-cheapest of its diversified peers.

The analysts also believe that Glencore offers the "cleanest" exposure to growth trends such as electric vehicles and its portfolio leans more toward consumption-driven commodities, with less exposure to the steel market. JPMorgan expects Glencore's shares to continue to perform strongly.

The rating for BHP Billiton was raised to "neutral" given the possibility of improved capital allocation and returns supported by the potential sale of its U.S. onshore assets. The company's valuation has also improved and is now about 10% cheaper than Rio Tinto across a range of metrics.

Rio Tinto was downgraded to "neutral" as a result of its recent price surge, which eliminated a valuation discount seen in recent years.

According to JPMorgan, Rio Tinto is now trading at a premium compared to BHP Billiton and is the most expensive stock among its peers. While the company's astute capital allocation and strong capital returns will continue to be valued by long-term shareholders, these factors were deemed to be already priced into Rio Tinto's shares.

JPMorgan cut the target price for Rio Tinto's stock to 3,750 pence per share from 4,100 pence per share, while BHP Billiton's price target was raised to 1,400 pence per share from 1,235 pence per share.

Norsk Hydro ASA was also downgraded to "neutral" from "overweight" on valuation grounds and peaking aluminum prices as well as market sentiment on the commodity's price, while Boliden AB's rating was lowered to "underweight" from "neutral" as a result of its free cash flow profile that is expected to get worse in 2019.

The target price for Norsk Hydro's stock was reduced to 57 Norwegian kroner per share from 61.50 Norwegian kroner per share, and Boliden's was raised to 225 Swedish kronor per share from 220 Swedish kronor per share.

In the precious metals space, JPMorgan revised its rating on Randgold Resources Ltd. to "neutral" from "overweight," with the target price decreased from 8,300 pence per share to 7,100 pence per share due to a "poor" outlook on the gold price.

"We are cautious on precious metals prices in 2018 given expected Fed tightening which is typically negative for gold prices," the analysts wrote.

Acacia Mining plc was downgraded to "underweight" from "neutral" due to near-term risks associated with a proposed framework agreement that will see Acacia and the Tanzanian government sharing economic benefits generated by Acacia's operations on a 50/50 basis. The target price for the company's stock was cut to 170 pence from 230 pence.

JPMorgan listed Anglo American Plc, Glencore and KAZ Minerals PLC, all with "overweight" ratings, as its top picks for the sector, with "underweight" Antofagasta Plc, Boliden and PJSC Norilsk Nickel Co. named as its least preferred companies.

On Dec. 11, Desjardins Securities initiated coverage of 16 gold producers and royalty companies to reflect looming changes to U.S. monetary policy, expecting short-term interest rates to increase. Analyst Josh Wolfson said his outlook for gold equities going forward is "neutral," citing fair valuations, though the outlook for gold itself remains uncertain.

"In the current normalization process, we expect the Fed to continue to raise short-term interest rates," Wolfson said. "However, the stability of markets could become a challenge (yield curve levels, above-average market valuations, debt and entitlements relative to GDP). Should growth stall, absent major systemic risk, we believe the outlook for gold is uncertain as its track record during these events has been mixed."

"Buy" ratings were given to Agnico Eagle Mines Ltd., Detour Gold Corp., IAMGOLD Corp., Osisko Gold Royalties Ltd., Royal Gold Inc. and Wheaton Precious Metals Corp.

Barrick Gold Corp., Alamos Gold Inc., Eldorado Gold Corp., Goldcorp Inc., Randgold Resources, Torex Gold Resources Inc. and Yamana Gold Inc. were tagged with "hold" ratings, while Franco-Nevada Corp., Kinross Gold Corp. and New Gold Inc. were given "sell" ratings.

Another coverage initiation came from Roth Capital, which started McEwen Mining Inc. with a "buy" rating and a US$3.25 price target in a Dec. 11 report.

Roth Capital analyst Jake Sekelsky noted McEwen's ongoing evaluation of growth opportunities and is positive on the company's acquisitive nature, citing the recent purchase of the Black Fox gold mine in Ontario. Sekelsky also highlighted the value of the company's Los Azules property in Argentina, which hosts a global resource base totaling 29.5 billion pounds of copper.

Morgan Stanley upgraded Freeport-McMoRan Inc. to "equal weight" from "underweight" in a Dec. 11 research note, after the firm's metals team raised its 2018 forecast for metal prices, with upside to spot aluminum, copper and zinc prices expected to remain near current levels.

The target price on the miner's stock was raised to US$14 per share from US$10 per share due to the copper outlook.

U.S. Steel Corp. also saw an upgrade, with Axiom Capital moving the steelmaker to "hold" from "sell" with a US$37 price target on the stock. Axiom analyst Gordon Johnson sees the Trump administration's protectionism as a positive for U.S. Steel, which, combined with positive seasonality, could create a "more optimistic tone" in the near-term.

Johnson said in a Dec. 11 note that there are too many near-term tailwinds supporting U.S. Steel, including the domestic steel sector entering a seasonally strong part of the year for demand, during which hot-rolled coil prices tend to rise.

In addition, Moody's upgraded PT BUMI Resources Tbk.'s corporate family rating to B3 from Ca, with a stable outlook.

"The upgrade of Bumi's rating to B3 reflects its emergence from bankruptcy with a lower debt balance and the absence of material debt maturities until December 2022," Moody's analyst Maisam Hasnain said Dec. 15.

The B3 rating is also supported by Bumi's position as Indonesia's largest thermal coal producer with steady production levels, while the stable outlook reflects expectations that Bumi will maintain prudent financial policies as it proceeds to implement strategies focused on increasing production and reducing absolute debt levels over the next year and a half.

As of Dec. 14, US$1 was equivalent to 8.29 Norwegian kroner and 8.44 Swedish kronor.