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Glencore stands out in JP Morgan Cazenove's sector valuation for EMEA


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Glencore stands out in JP Morgan Cazenove's sector valuation for EMEA

Glencore PLC was deemed the outstanding stock by J.P. Morgan Cazenove in a valuation analysis of the EMEA metals and mining sector, ahead of Rio Tinto and Anglo American PLC.

In a June 15 note, the bank's analysts said Glencore's mark to market EBITDA has risen about 40% since December 2017, while its shares only added 10% over the period.

By contrast, Anglo American's EBITDA dropped about 3% while its shares gained 25%, and Rio Tinto's EBITDA was up 2% while the share price rose 20%.

Rio Tinto is tagged with a neutral rating by J.P. Morgan Cazenove. Glencore and Anglo American have an overweight recommendation.

"Glencore and Anglo American offer a combination of more attractive valuation metrics (enterprise value/EBITDA ratio and/or free cash flow yields) versus Rio Tinto and BHP Billiton Group, exposure to compelling structural growth trends and, in the case of Anglo American at least, an improving geopolitical risk profile," the analysts said.

In early May, Anglo American said it was off-loading its 10% stake in Nautilus Minerals Inc., which is developing a seabed project in the territorial waters of Papua New Guinea. Earlier in the year, the company reduced its interest in South Africa-based Royal Bafokeng Platinum Ltd. and also said it was willing to sell up to 30% of the Quellaveco copper project in Peru, mentioning risk.

The enterprise value/EBITDA ratio, also known as the enterprise multiple, assesses a company's relative business value.

According to the bank, valuations in the mining sector have rerated but remain attractive, with share prices of U.K.-listed diversified miners up by about 25% on average since December 2017.

Average estimated free cash flow yields have been lowered to 11% from 14% for 2018 and to 13% from 15% for 2019. The average mark to market enterprise value/EBITDA forecast for 2018 was rerated to 4.9x from 4.2x for 2018 and to 4.4x from 3.8x for 2019.

The team's model implied that Anglo American's 7.5x price/earnings ratio and 3.5x enterprise value/EBITDA stand at a 20% to 25% discount to BHP and Rio Tinto, while Glencore's 5.7x price/earnings ratio and 3.7x enterprise value/EBITDA reflect a 40%/20% discount.

"Free cash flow for the sector remains attractive and can support growing cash returns across 2018 to 2019," the analysts added. "We calculate spot commodity prices need to fall 20%-25% before the U.K. diversifieds fall to the approximate 5% [free cash flow] yield of the market."

On the back of accelerating and aligned global growth, U.S. dollar weakness and rising inflation, J.P. Morgan Cazenove is bullish on commodities in 2018, predicting a late-cycle upward trend for commodity prices.