Metals and Mining
Mulled Mine 2014 * Investment thesis – We remain neutral on the metals and mining sector on a six-month view; however, we think the sector can potentially deliver a strong second-half 2014 performance based on free cash flow, cost cutting and volume growth as the market looks into 2015. * 2013 the year that was – In 2013 the mining companies changed CEOs, cut capex plans and focused on costs but, despite this, the sector has underperformed the FTSE 100 by around 24% YTD. This looks set to be the third year running that the sector has underperformed, following 19% underperformance in 2011 and 12% in 2012. * 2014 and inflection year? – We believe that 2014 will be a tale of two halves. We believe the sector will perform in line with markets in the first half of 2014 driven by a near-term slowdown in China and a muted commodity price outlook. However, we think the sector will benefit in the second half from improving free cash flow yields and improving balance sheets driven by reduced capital spend and cost cutting. We see 2015 as a potential fillip year for the mining industry and we think that investors should position themselves for this by mid-2014. * Valuation – We forecast the sector to deliver CAGR in earnings of around 7% until the end of the decade, driven principally by volume growth and cost cutting rather than by commodity prices. Importantly, we forecast free cash flow yield to grow at a CAGR of 23.9% until the end of the decade, which is a function of cutbacks in capex. Overall, we estimate the sector is trading at a c10% PE discount to the UK market, with Rio Tinto remaining the cheapest name on a relative basis. * Risks – The key risk for 2014 is a deterioration or even collapse in emerging markets growth, which if to occur would result in further downward pressure on commodity markets. US tapering could also provide broader support for the US$ which again could provide downward pressure on commodity markets. * Stocks for 2014 – We believe the large diversified miners will outperform the sector in 2014. Rio Tinto remains our favoured Buy among the large-cap UK diversified mining companies, followed by Glencore-Xstrata. We have Sell ratings on Antofagasta, First Quantum, Nyrstar, New World Resources, African Barrick, Assore, Fresnillo, Hochschild, Petropavlovsk and Randgold Resources. We remain underweight the gold and base metals stocks and our least favoured name among the large-cap miners is Anglo American.