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Atalaya shares offer 70% upside potential; ArcelorMittal downgraded to sell

Atalaya Mining plc stock made it to Cantor Fitzgerald Europe Research's coverage space with a buy recommendation and a target price of £2.17 per share with 70% upside.

The equity research firm believes that despite the recent rise in Atalaya's share price, the stock is undervalued, trading at 0.4x the net present value of the company and below other London-listed copper producers.

Based on its long-term price assumption of US$2.80 per pound of copper and US$20 per ounce for silver, the broker values the company's NPV at £2.97 per share, or £346.7 million, using an 8% discount rate.

Cantor Fitzgerald attributed the valuation to the ramp-up of the company's Proyecto de Rio Tinto copper-silver mine in Spain, which is expected to produce up to 40,000 tonnes per annum of copper production in 2017, amid a significant rebound in copper prices.

"Atalaya is the largest copper producer listed on AIM, and should produce well over [30,000 tpa] on average over the next 15 years," research analyst Asa Bridle wrote in a Dec. 20 note.

The miner aims to produce 34,000 tonnes to 40,000 tonnes of copper in 2017 after it achieved nameplate capacity of 9.5 million tonnes per annum during a 10-day run in December.

Bridle also praised the company's management for slashing CapEx to an estimated US$153 million to reach the 9.5 Mtpa phase-two target, as opposed to US$252 million calculated in a 2013 study. This was achieved through a combination of greater refurbishment of existing plant and infrastructure than originally planned, as well as currency devaluation, and reduction of other costs.

The project is supported by Atalaya's largest shareholders including its three off-take partners, Trafigura Beheer B.V., Yanggu Xiangguang Copper and Orion Mine Finance, which enabled project financing without the company having to look to debt markets.

"Atalaya Mining […] has been involved with Riotinto since 2007. However, it is only in the last two years that the project's potential has become tenable in our view with ownership, licensing and financing all taking considerable time to play out. However, under Alberto Lavandiera's leadership since late 2014, progress on all fronts has accelerated."

The first copper concentrate was produced in August 2015 with the first shipment completed in January, while commercial copper production was declared on Feb. 1, and the company hit positive EBITDA in the third quarter as its intermediate production target of 7.5 Mtpa was achieved in March/April.

In addition, the project's mine life could be extended beyond the initially planned 17 years, as exploration in and around the mine is underway focused on adding to the current 153-million-tonne reserves estimate.

Meanwhile, UBS changed its outlook on the EU steel sector to negative, due to its view that global steel outlook for 2017 is at a risk of a potential margin squeeze. UBS expects EU steel to see margins contracting by 17% next year as a result of rising raw material costs, higher inventory levels, and the return of 4 million tonnes of shuttered capacity that will hit the profitability of the bloc's steel mills.

Against this backdrop, UBS downgraded European steelmakers including ArcelorMittal and ThyssenKrupp AG, among others.

"Given the improved profitability in the steel sector, predominantly due to the temporary utilization rate increase at the beginning of the year, together with the Chinese stimulus, we see the steel industry 'kicking the can down the road' rather than do the necessary steps to sustainably improve profitability," UBS wrote in a Dec. 19 report.

European steel sheet inventories are up 18% in the year to date through September, while steel utilization rates remain at only 74% in the EU for 2017, which is not enough to regain pricing power as was seen in 2011/12 and 2014/15.

ArcelorMittal was downgraded to sell from buy, with a new target price of US$6.30 or €5.70 per share. UBS outlined a 2017 EBITDA estimate for the steel major of US$5.4 billion, which is 17% below consensus. The group's stocks closed at €7.13 on Dec. 22, according to SNL Metals & Mining data.

UBS expects ArcelorMittal's shipments to increase by 2.4% next year, predominantly driven by the group's North American, Brazil and European steel businesses, although the higher volumes will be unable to offset the margin squeeze due to lower steel prices.

"ArcelorMittal is the most sensitive steel stock in our coverage universe with regard to falling raw material prices," UBS concluded.

German steelmaker ThyssenKrupp was also downgraded, to sell from neutral, with its target price lowered to €18 per share from €20 per share. In comparison, the company's stock was trading at €23.40 as of Dec. 14.

The company will remain behind its peers in free cash flow generation and is expected to return only €134 million in 2016/17.

Furthermore, S&P Global Ratings rewarded Australian iron ore miner Fortescue Metals Group Ltd. on its debt reduction measures, raising its issuer credit rating on the company to BB+ from BB with a stable long-term outlook.

This reflected the rating agency's expectation that the miner will operate within its financial policy and will maintain its growth strategy in line with the rating level.

S&P Global Ratings also upgraded its corporate credit rating on Chicago-based gold miner Coeur Mining Inc. to BB- from B+, with a stable outlook. The upgrade reflected anticipated sustained improvement in the miner's credit measures, which saw its debt reduced by more than half from 2015 year-end levels.

Meanwhile, Patersons Securities assessed ASX-listed Troy Resources Ltd., downgrading its stock to a speculative buy rating from buy, with its target price decreasing to 40 Australian cents per share from 53 Australian cents per share.

This followed an increase in unstable ground conditions around the southern wall of the Smarts pit at its Karouni gold mine in Guyana.

The development forced the gold miner to further decrease its gold production guidance for 2016 to between 63,000 ounces and 65,000 ounces, down from its revised August forecast of between 70,000 ounces and 80,000 ounces for the full calendar year.

"This is yet another disappointing setback for Troy at its Karouni operations in Guyana, which have been impacted by several issues which include: weather, mill lubrication system issues and wall slippages," Patersons noted.

S&P Global Ratings and SNL Metals & Mining, an offering of S&P Global Market Intelligence, are both owned by S&P Global Inc.