Metals & Mining Chart Pack
The New Hope – Downgrade to Bearish
* 6 month view to Bearish — We are moving our 6 month stance to bearish, reversing our upgrade of the sector following the Brexit vote. The sector has run hard both in absolute and relative terms, being the best performing sector in Europe over the past 3 months. Our momentum indicators suggest this performance is unlikely to continue.
* Time to Cool it – Per our analysis current share prices are justified on current spot earnings (based on PE/EV/EBITDA), however we think commodity prices would need to move higher to drive the sector which runs contrary to our house base case view. The sector has followed global dollar liquidity and broader Chinese macro indicators, which we expect to get seasonally slower over the next few months. On the stock side, we would argue that the self-help alpha stories of improving balance sheets, cost cutting and capex are now priced in. The one valuation metric where the mining companies look 'cheap', is on spot free cash flow yield but this is not being translated into dividend yields and therefore
requires investors to make a leap of faith and HOPE that management will give them cash back. We think this risk is not worth taking and we think value is c20% down from here.
* EU Steel Stocks look more defensive on protectionism - Steel companies in the EU/US with inferior positioning on global cost curve could see significant boost in cash flow from comprehensive or near comprehensive protectionist measures. Protectionist measures could remain in place for several years, possibly longer, by virtue of long drawn out process of challenging and overturning such measures. Steel stocks in this region tend to be under owned and/or disliked by investors due to historical poor competitive positioning. We highlight our Buy rating on MT, STLD, SZG and X, which
we think are in the best global position to benefit.
* We have got Sell ratings on Anglo American, Vale, South 32, Boliden, Nyrstar, Ferrexpo, Randgold, Fresnillo, Acacia, Gem Diamonds, and Vallourec. Buy rated stocks are KAZ Minerals, ArcelorMittal, Aperam, Outokumpu, Salzgitter, Petra Diamonds, and Dominion Diamonds.