Broker tips: Cairn Energy, Miners

Morgan Stanley reiterated its 'overweight' stance on Cairn Energy following the company's results a day earlier.

"While Cairn's shares sold off materially post the earnings presentation, our thesis remains unchanged. We believe that management delivered a consistent message, particularly on Senegal, once again demonstrating the strong fundamentals of the project," it said.

It said that three major "blocks" primarily define Cairn: the development resource opportunity in Senegal, including the SNE project, two key startups currently ramping up in the UK - Kraken and Catcher - and the 5% stake in Vedanta.

In particular, it argued that the SNE exploration well in Senegal is highly profitable but the value of the project remains underappreciated by the market.

"Assuming a $65/bbl real Brent price, we estimate the SNE project in Senegal could be worth around 160p, 80% of the share price. After today's weakness, we believe the market is once again rewarding for 60% of that value.

"We expect the market to place more confidence on the SNE project as we approach the project sanction date. We believe it also increases the chances of early monetisation via a farm-out."

Having repaired their balance sheets and with a robust outlook for commodity prices, given strong economic growth in the 'Rest of the World' that was offsetting softness in China, Goldman Sachs upgraded its view on the European Metals & Mining sector from 'neutral' to 'attractive'.

As a result of the above factors, Goldman estimated that, at the prevailing spot prices for commodities, most miners would move into a net cash position over the next two years.

"We do not believe that it is necessary to expect a period of higher commodity prices to take a positive view on mining equities. Rather, we see a belief in the sustainability of spot prices as sufficient.

"Despite this, the miners currently trade at a discount to their mid-cycle valuation multiples (in some cases a more than 50% discount), which we believe reflects investor doubt over the sustainability of commodity prices. As such, the longer spot prices persist, the more likely we believe it is that the sector will continue to re-rate," analysts Eugene King, Abhinandan Agarwal, Felix Schlueter and Peter Hackworth said in a research note sent to clients after the London market close on Tuesday.

Indeed, even with their levels of capital expenditure set to rise, Goldman still foresaw "significant" free cash flow generation which would be avilable to support enhanced returns for investors.