Barclays cuts European mining sector to 'neutral' on cloudy outlook

Barclays downgraded its stance on the European mining sector to ‘neutral’ from ‘positive’, noting that 2015 has been another bad year.

The bank pointed out that the last five years have marked the worst performance since 1966 and said it’s hard to see what might pull the sector out of its tailspin.

“A demand shock seems unlikely given the state of China’s economy, although there are some signs of near term improvement,” it said.

Barclays cut BHP Billiton to ‘equalweight’ from ‘overweight’ and trimmed the target price to 1,155p from 1,580p.

As the bank went to print with its note on global mining, news of the dam accident in Brazil broke.

It said any estimation of the financial cost of this is impossible to predict but it reckons it could be over $1bn. “It will, however, almost certainly remain a drag on the share price in the short term.”

Barclays said BHP remains a reasonable place to hide in the current environment, given sector-leading margins, a fairly robust balance sheet and ongoing decent operating performance.

However it said the company clearly needs to do much more to get its capex down to sustainable levels, as the dividend is uncovered on spot prices and the bank’s base-case forecasts for the next three years.

Barclays cut Vedanta Resources to ‘underweight’ from ‘overweight’ and slashed the price target to 400p from 565p. It also cut Kaz Minerals, to ‘underweight’ from ‘equalweight', halving the price target to 100p.

It said the investment case for Vedanta remains challenging. “The company’s substantial non-productive invested capital continues to show few signs of being brought into profitable production. If anything it is increasing with capacity closures in aluminium and alumina.

As far as Kaz is concerned, it said the investment case remains high risk. Barclays said it continues to carry an extremely leveraged balance sheet with little margin for error, adding that Kaz will generate no earnings or free cash flow until 2018 before emerging as a more profitable entity once the growth projects ramp up.

The bank cut Acacia Mining to ‘equalweight’ from ‘overweight’, chopping the price target to 210p from 325p. It said that without exception, year-to-date production has trailed both company guidance, and the bank’s own more conservative forecasts resulting in materially lower EBITDA generation.

While Barclays still expects a fourth-quarter pick-up in production and for momentum to continue into 2016, it sees downside risk to consensus earnings forecasts.

It upgraded Rio Tinto to ‘overweight’ from ‘equalweight’, nudging the price target down to 2,800p from 2,850p . The bank said Rio still screens the best on valuation and balance sheet strength.

“We view Rio as offering many of the attractions of BHPB’s investment case but with lower risk from the balance sheet and a management team further along the curve of capital preservation measures.”

Barclays kept Glencore at ‘overweight’ but removed the stock from its ‘top pick’ list and cut the price target to 160p from 186p. It said the company is making good progress on debt reduction plans but it’s not out of the woods yet.

At 1100 GMT, BHP Billiton shares were down 1.6% at 936.80, Vedanta was 2.9% weaker at 451.70p, Kaz was 8.6% lower at 91.10p, Acacia was down 2.1% to 164.70p, Rio was off 0.3% at 2,285p and Glencore was 2.7% lower at 106.75p.