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South32 rally wows analysts, though M&A views differ

The Research Rounduphighlights some of the more noteworthy analyst views making waves in theinternational metals & mining space.

South32 Ltd.was in the spotlight this week as its shares continued to rally, rising21% in the week to July 12 and more than 80% in the year to date.

Analysts have taken notice of South32's bullish run, leadingPatersons Securities Ltd. to upgrade its recommendation for the miner's stockto a buy rating, with a 9.9% increase in the price target to A$1.97 per share.

In a July 13 note, Patersons said South32 looks attractiveat current levels, given that the company is in a net cash position, with themanagement capability and balance sheet strength to grow through acquisitions.On the back of implementing restructuring initiatives to adjust its cost baseto a low commodity price environment, Patersons expects the miner to continuecost reductions across the organization.

Credit Suisse also increased its price target for South32shares to A$1.80 per share from A$1.70 per share but maintained a neutralrating on the stock.

Unlike Patersons' view on acquisitions, Credit Suisseanalyst Paul McTaggart told investors in a July 12 note that M&A activityfor South32 is less likely in the near-term on the back of rising valuations.This, however, led the analyst to conclude that added capital returns toshareholders appeared "inevitable" in the absence of suitable othercapital investment opportunities.

Meanwhile, Citi said it does not see a major risk ofM&A, citing the "discipline shown to date in a market where qualityassets are clearly not trading at bargain prices." The bank alsomaintained its neutral rating on South32's shares, with an increased pricetarget of A$1.75 from A$1.55.

On the selling side, UBS analysts anticipated CEO Jean-Sebastien Jacquesto speed up the company's asset sales program, expecting at least US$4 billionin noncore asset sales over the next three years.

The bank deems some 16% of Rio Tinto's asset base, or aboutUS$16 billion, to be noncore. It also stated that a cleanup of the miner'sportfolio will likely be based on a balancing capital/ cost discipline strategywith organic growth rather than acquisitions.

UBS reiterated its buy rating on Rio Tinto shares butincreased the stock's price target to 2,900 pence per share.

Another major, GlencorePlc, this week saw its outperform rating maintained by Sanford C.Bernstein, tagged with a target price of 250 pence per share, representing a41% upside to Glencore's 177.80 pence per share closing price on July 11.

According to the July 13 Bernstein note, Glencore andVale SA are among thetop nickel producers and as such should benefit most from a possible rally innickel price as the Philippines — a major nickel supplier — launched acrackdown on mining companies in the country, threatening the metal's supply.Based on the firm's estimates, a 30% rise in nickel prices would boost Glencore'sEBITDA by 4% and Vale's by 9%

In separate notes issued the same day, Patersons andInvestec both underscored the Philippines' role in nickel prices' recent rally.However, Investec said the metal's price is unlikely to increase further giventhe large stockpiles available on the London Metal Exchange and elsewhere.

Meanwhile, the earnings season for the June 30 is startingto gain pace.

Somers & Partners on July 11 downgraded 's stock to sellfrom hold, despite an increased price target of A$3.38 per share frompreviously A$3.07 per share, on the back of the company's full-year andquarterly production reports.

"Our recommendation has reduced on the back of a rapidincrease in the company share price that coincided with favorable nickel priceperformance," Somers said, noting that market valuations exceeded its ownestimates.

The firm attributed the increased target price to a highergold price assumption of US$1,300 per ounce, the improved copper output fromIndependence Group's Jaguarmine in Western Australia and the nearer-term cash flow opportunity from thecompany's Novamine.

In another July 11 note, Somers reiterated its hold ratingbut increased the price target for PerseusMining Ltd. to 71 Australian cents from 60 cents after the company'sgold output in the last quarter ended exceeded expectations.

Further citing its improved gold price assumption, Somerssaid Perseus remains "extremely leveraged" to gold's U.S. dollarprice as a high-cost producer.

Meanwhile, RBC Capital Markets slashed its 2016 and 2017 EPSestimates for Potash Corp. ofSaskatchewan Inc. to 59 U.S. cents and 87 cents, from 71 cents and98 cents, respectively, ahead of the release of the company's second quarterreport.

RBC said in its July 13 report that while Potash Corp. hasdone well in reducing costs and optimizing operations, potash fundamentalsremained difficult in the second quarter partially due to lack of contractsettlements, slow demand and a competitive market.

While the potash market is expected to see near-termimprovement, RBC noted that the progress will be very gradual. The firm alsosees Potash Corp.'s long-term dividend sustainability as an ongoing concern.

The bank reiterated its sector perform rating andUS$16-per-share price target on Potash Corp.'s stock.