HSBC unveiled Anglo American Plc and Glencore Plc as its top picks in an Oct. 3 research note assessing four large diversified mining companies listed on the London Stock Exchange, including BHP Billiton Group and Rio Tinto.
The bank noted that the four mining majors have reported higher six-month earnings, with earnings in the second half of the year likely to be stronger than the first half as most commodity prices continue to rise.
Key commodities, however, have muted production growth, limiting growth opportunities for large miners. According to HSBC, the company valuation comes down to three catalysts for earnings: being in the right commodities, surplus cash distribution and being positioned for value-adding M&A or corporate restructuring.
While BHP Billiton and Rio Tinto are best positioned to raise disbursements to shareholders in the near term, all four mining giants are in good shape for distributions in the medium term, the bank said.
Moreover, HSBC's preference for base metals over bulk commodities favors Glencore, and the bank sees Anglo American as the company most likely to undertake a significant restructuring, given the imposts of its South African asset base, while only Glencore seems to have the appetite for opportunistic M&A.
HSBC gave Anglo American a "buy" rating and a target price of 1,630 pence per share, up from 1,410 pence. Glencore also garnered a "buy" rating, with a target price of 420 pence per share. BHP Billiton received a "hold" rating and a target price of 1,500 pence per share, up from 1,400 pence, and Rio Tinto was assigned a "buy" rating and a target price of 3,900 pence per share.
Separately, MorningStar analyst Matthew Hodge recently recommended that shareholders reduce stakes in BHP Billiton and sell Rio Tinto stocks. The analyst believes that the recent rise in commodity demand and prices is only a "cyclical upturn" related to China's 2016 stimulus.
According to Hodge, the two companies are overvalued because investors are "too optimistic," while structural headwinds remain in the long term as China's steel consumption is estimated to decrease in the next 10 years.
Steelmakers Nucor Corp. and Steel Dynamics Inc., meanwhile, saw downgrades from Longbow Research on Oct. 2, with both companies cut to "neutral" from "buy."
Longbow lowered its estimates for the entire steel sector after seeing considerable slowing in carbon steel orders. Industry sources estimate hot-rolled coil steel prices averaging US$580/tonne to US$590/t at year-end, down from a previous estimate of US$640/t.
In its note on Nucor, the Longbow said there is risk of metal spread contraction in the next two quarters and Nucor shares could see selling pressure if the company's management talks down the fourth-quarter outlook.
On the other hand, Longbow said in its Steel Dynamics research note that many distributors are looking to liquidate downstream steel inventories on the backdrop of investor speculation about potential benefits associated with reducing global supply.
ThyssenKrupp AG was downgraded by Barclays on Oct. 3 to "underweight" from "equal weight," and its stock was assigned a €21 price target.
On Oct. 4, Gabelli analysts downgraded Alcoa Inc. to "hold" from "buy" and raised the target price for the company's stock to US$60 per share from US$57 per share.
Gabelli cited the company's valuation for the downgrade, saying the recent price action in proxy Alumina Ltd. over-represents alumina fundamentals. The firm said Alcoa's merger with Rio Tinto's aluminum business is less likely to happen until prices normalize.
Bank of America Merrill Lynch, meanwhile, raised its target price for Alcoa shares to US$56 per share from US$50 per share and maintained its "buy" rating on the company.
Also included in this week's downgrades, Goldman Sachs Group cut its rating for Albemarle Corp. to "neutral" from "conviction buy" after the company's shares surged 62% this year.
In an Oct. 6 note, Goldman Sachs said Albemarle has transformed into a "thematic growth engine" over the past two years, from a value-oriented chemical stock, as investors turned their focus to the potential of the electric vehicle industry.
The firm retained its US$142-per-share target price on Albemarle stock, estimating that any upside is priced in close to the target, though the lithium market is expected to remain tight until the end of the decade.
In terms of upgrades, Monness Crespi Hardt & Co. Inc. raised its rating for Compass Minerals International Inc. to "buy" from "neutral" in an Oct. 2 note and tagged the miner's stock with a price target of US$76 per share.
The firm's analysts expect Compass Minerals' earnings to improve over the next two years and free cash flow to increase substantially in coming years, accelerating EPS growth by reducing debt and paying higher dividends, with limited downside to the share price given current levels.
In addition, Roth Capital initiated coverage on Klondex Mines Ltd. Oct. 4 and assigned the miner a "buy" rating and a C$5.25 price target.
According to Roth Capital analyst Jake Sekelsky, Klondex Mines' focus on acquiring underperforming and past-producing assets will benefit the company in the near term.