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RBC sees Glencore as best-positioned London major in looming trade war

Swiss mining giant Glencore PLC is set to be best-positioned relative to peers to defy the impact of a looming trade war between the U.S. and China, according to a March 23 note by RBC Capital Markets.

Assessing the repercussions of U.S. tariffs on some US$60 billion in Chinese products and responding actions by China, the team tagged Glencore as the preferred stock among London-listed mining companies with an "outperform" rating, namely Rio Tinto, Vale SA and Anglo American PLC.

"[Glencore's] trading business is likely to see less volatility in earnings than pure mining businesses. In addition, the lack of correlation from the growing cobalt profitability (and we would argue thermal coal) will help to insulate earnings here too," the team stated. "Although Rio Tinto has the lowest gearing [for 2017 at 8%], we would expect earnings volatility to rise."

Glencore is a major metals producer as well as a trading house, a business arm that few other miners possess.

According to RBC's model, Glencore's gearing in 2017 stood at 18%, while gearing for Anglo American and Vale stood at 13% and 29%, respectively.

Overall, the analysts said that diversified miners were in "incredibly strong shape" to enter what they described as "the most unstable trade framework since the Second World War."

"Free cash yields remain elevated as CapEx remains at or near cyclical lows. The average gearing level for the London diversified miners is 15%," the team elaborated. "A sell-off in valuations as multiples contract could provide an elegant opportunity to pivot towards accretive acquisitions, something that was unable to be achieved in the previous downturn."

RBC also flagged that shocks to the stability of the global economy, in particular in China, posed a bigger threat to mining companies than specifics around the new tariffs.

"China is already facing a slowing property market, a more hawkish U.S. Federal Reserve and local [consumer price index] at 2.9%," the analysts noted.

"The new tariffs are likely to serve to reduce export demand for goods, but more importantly are likely to reduce wider confidence in the economy as a whole. The first impacts of this can be seen in the moves over the past 24 hours with steel prices, iron ore prices and base metals prices all lower."

If global growth remains resilient in the medium term, the mining sector could even benefit from increased base-level inflation as a result of the tariffs, according to RBC.