Valuing the increased risk appetite
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Event: We are increasing our target prices for Anglo-American, Xstrata,
ENRC, Kazakhmys, Vedanta and Antofagasta on the back of the improved
investor risk appetite driven by global IP momentum. We are also revising
our earnings forecasts following recent Q1’09 announcements. Our FY’09
and FY’10 EPS estimates increase by an average 23% and 12%
respectively. We are downgrading Anglo American from Outperform to
Neutral as we see limited upside to the current share price and potential
earnings downgrade risk on iron ore.
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There is still potential value upside in the miners with a 12-month view.
(1) Global IP momentum appears to have troughed in January/February
2009. According to Credit Suisse’s global strategist, Jonathan Wilmot, global
IP could spike to above 10% in July. (2) Going forward, we believe that
positive IP momentum could be supported by an imminent restocking cycle
and the global stimulus programmes of the central banks. 3) Miners are
currently trading at spot P/B of 1.3x and 1.2x on our 2009 and 2010
estimates—well below the long-term trend P/B average of 2.2x.
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We advise caution on bear market rallies: The disparity between price
rallies of traded commodities and current weak real demand may lead to
market corrections, in our view. We believe these corrections could offer
attractive entry points into the sector.
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We still prefer early cycle, relatively cheap plays: Copper remains our
preferred metal—we believe it has the best fundamentals given the historical
chronic supply constraints and diversified end-user market. We prefer
relatively cheap early cycle plays such as Xstrata and Kazakhmys, which are
trading at 0.8x and 0.7x on 2009E spot P/B respectively, reflecting 33% and
46% discounts to their peers. Moreover, Xstrata and Kazakhmys are trading
at spot 2009E P/Es of 9.3x and 13.3x respectively, reflecting 63% and 53%
discounts to their peers.
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Valuation: We reiterate our Outperform rating on Xstrata (TP £10.60 from
£6.00), Kazakhmys (TP £9.50 from £3.60) and ENRC (TP £7.70 from £5.80).
We are downgrading Anglo American (TP £17.50 from £15.50) from
Outperform to Neutral as we see limited upside potential to the current share
price and earnings downgrade risk on iron ore. We reiterate our
Underperform ratings on Vedanta (TP £11.20 from £7.00), Antofagasta (TP
£5.10 from £4.50) and Eramet (TP