Anglo American slumps on HSBC downgrade

Anglo American was under pressure after HSBC downgraded the stock to ‘reduce’ from ‘hold’ and slashed the price target to 410p from 770p as it pointed to the miner’s precarious cash flow situation.

HSBC said that before further capex cuts, Anglo would likely burn at least $2.7bn in 2016 on spot prices to maintain the dividend.

“We see high likelihood of a zeroed dividend (now in our numbers), which saves $1.1bn cash annually,” it said.

Should Anglo reinstate the dividend at a later stage, a payout ratio – with provision for specials – is more prudent.

HSBC said further cost cuts are likely at the 8 December update, but the bank questioned whether this would be enough.

“We see scope for capex to be reduced to around $2.7bn post 2016 and $3.3bn in 2016 (current guidance $3.6-3.9bn),” it said.

HSBC reckons corporate costs and overheads are the key area of viable opex cuts, although not a new target area. Any further cost cut efforts at operations will only go some way to offset more than 5% South African inflation.

The bank estimates that Anglo will still burn $1.6bn in annual cash flow post expected opex, capex and divi cuts on spot prices.

At 0956 GMT, Anglo shares were down 6.4% at 423.20p.