Mining to rise out of the downturn in 2017

Bankers are seeing mining returning to form in late 2016/17, with predictions of commodity prices rising by a fifth.

Morgan Stanley is bullish on mining again, after earlier this week putting an ‘attractive’ tag on the sector, stating the industry is at an historically attractive level, according to the Wall Street Journal.

The bank lifted its recommendations for the majors, moving Rio Tinto and BHP from ‘overweight’ to ‘equal weight’, and Anglo American from ‘equal weight’ to ‘underweight’.

According to the bank they expect commodity prices to rise approximately 19 per cent by 2017, carrying out “a sharp reversal from the experience in the last 18 months”.

“Emerging markets and China in particular remain key to commodities demand. In the next few months we expect the perception around this demand to improve. In particular the acceleration of financial and administrative stimulus policies in China in recent weeks should start to feed through in both actual activity levels and equity market expectations,” Morgan Stanley analysts stated.

Earlier this week Australia’s chief economist also pegged the bottom of the mining downturn.

In its report it outlined positive guidance.

“Over the medium term, the outlook for the Australian resources sector is largely positive,” the report said.

“The prices of several commodities, in particular iron ore and coal, are projected to increase moderately towards the end of the outlook period. In addition, production and export volumes are projected to increase as the recent investment in the sector contributes to increased output.

“The strongest growth in export earnings is projected for LNG, where the development of new projects on the east coast of Australia is projected to contribute to a near tripling of LNG exports,” it said.

“Australia’s earnings from resources and energy exports are projected to reach $235 billion (in 2015-16 dollars) by 2019-20. Earnings from resources exports are projected to total $138 billion (in 2015-16 dollar terms), while earnings from energy are projected to total $97 billion in 2019-20.”

This is a big turnaround for miners, and show renewed confidence in the sector after the massive rout suffered by Glencore following pessimistic investor notes released late last month.

Its shares have been skyrocketing since it underwent a massive drop by a third in its value.

The miner took a beating as its shares fell 29.42 per cent following analysts’ predictions of a continued commodity depression.

This was the second ‘record’ drop for Glencore in a week.

The Swiss diversified firm recorded a major drop late last, falling 16 per cent, with an overnight rout helping to wipe around US$13 billion off the miner’s value.

Investec analysts Hunter Hillcoat and Marc Elliot released notes stating Glencore would offer marginal value to shareholders, if the ongoing low commodities prices continue.

The two said that without major restructuring most of Glencore’s equity value would evaporate.

“The challenging environment for mining companies leads us to the question of how much value will be left for equity holders if commodity prices do not improve,” Investec said in a note to investors.

“Despite the drastic action that management has announced recently (even assuming all of the measures are successfully implemented), a spot price scenario results in an almost complete collapse in forward earnings such that no meaningful estimate of shareholder value can be derived under our price-to-earnings methodology,” Investec said.

However the market soon turned, with Glencore recovering value the following day.

Many believed the downwards move was a gross over-reaction.

Citigroup backed Glencore following the market slaughter, stating that the company didn’t have a stressed balance sheet, has the ability to sell assets – and is in the process with its agricultural stakes – and rated the business as a buy, according to Bloomberg.

“The markets response is overdone,” Citigroup said in a report.

“In the event the equity market continues to express its unwillingness to value the business fairly, the company management should take the company private, whereby restructuring measures can be taken easily and quickly.”

This position was supported by Jefferies Group LLC, which gave Glencore a hold rating, stating “there is value in Glencore shares if the company can pull the appropriate levers now, but risks are clearly very high”.

A resources analyst at Old Mutual Investment Group added: “I think what we’ve seen is an over-reaction.”

This continued move to offload its agricultural stake is only increasing market confidence, and has already seen investors buying up stock while it sits at a relatively low price.

“It’s definitely looking well-bid and if it’s distressed in terms of Glencore’s balance sheet then it’s going to get a lot of interest,” James Wilson, a senior analyst at Morgans Financial told Bloomberg.

“The agricultural sector is extremely well looked-at at the moment.”

Glencore is reportedly also considering approaches for the entire business unit, although the miner is yet to confirm this rumour.

Australian Mining has investigated whether mining has reached the bottom of the downturn, and what lays ahead for the industry. To read our report, click here.

 

 

 

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