Credit Suisse sees supportive macro for mining giants

Commodity prices will remain well supported for the next 12-24 months, which was part of Credit Suisse's reason for upping its share price targets for three of the big four UK-listed miners, BHP Billiton, Rio Tinto and Anglo American.

Taking on coverage of this quarter, analyst Sam Catalano analysed nearly 20 years of trading history to dig deeper into what drives the mining sector's performance.

One aspect driving his higher target was valuation metrics. "Whereas much of the sell-side prices miners by applying a ‘long-term average multiple’ to their near-term earnings estimates, our deep-dive indicates this can be risky when not also considering the direction of the earnings outlook.

"Multiples are most useful in the short term (<5-6 months), but longer holding periods are best driven by a view on the earnings cycle."

Catalano also saw the macroeconomic environment as supportive, contrary to the consensus analyst opinion, which suggests commodity prices will broadly decline.

"We think that while there will be volatility, prices will remain well supported around current levels for the next 12-24 months, underpinned by the capex cycle, which has not kept pace with consistent demand growth."

Rio Tinto remained at 'outperform' but its target price was lifted to £50 from £43, BHP Billiton was kept at 'neutral' but the target raised to £17.50 from £14.30 and Anglo American also stayed at 'neutral' but its target was hiked to £19 from £17.40.

Glencore remained the Credit Suisse top pick in the sector with an unchanged 'outperform' rating and £4.80 target price.

"Major miners' asset portfolios are varied, but in a relatively benign commodity price environment, the impact of these quality differentials is likely to be outweighed by the key strategic decisions management teams make on growth and capital allocation. To date, in our view, only Glencore has shown a strong commitment to balance between divestment/efficiency gains and growth."