Exane downgrades Anglo American, Antofagasta on valuation

Exane BNP Paribas downgraded Anglo American to ‘underperform’ from ‘neutral’ on valuation grounds and to reflect challenges associated with restructuring plans.

It also downgraded South32 and Antofagasta to ‘neutral’ from ‘outperform’, both on vauation grounds.

The bank said sentiment on Anglo has changed drastically over the past month, with the shares more than doubling since their 20 January low.

“The market had probably priced excessive fears at the end of FY15; commodity prices have now stabilised and the group has partly reassured on its ability to avoid burning cash this year,” Exane said.

Nevertheless, it reckons the shares have now run ahead of what the group can deliver short term while significant headwinds remain, with current iron ore and platinum prices at odds whit fundamentals.

In addition, it said restructuring remains a challenge and there is a risk the company will disappoint on disposals again this year.

As far as Antofagasta is concerned, it said copper prices hold long-term upside and the company is well positioned with its low cost assets and strong balance sheets.

“However, we believe these features are now fully discounted after the recent bounce in the shares (+53% from January lows).”

The bank has a 430p price target on Anglo and 580p on Antofagasta.

Exane downgraded South32 but lifted the price target to 75p from 70p, saying it was a genuine restructuring story but this was priced in.

“We still like the combination of the strongest balance sheet and operating leverage, and the stock still displays a c10% free cash flow yield in FY16e and FY17e (7.4% at m-to-m). However, the stock is up 47% year-to-date and has outperformed the sector by over 20%.”

At 0920 GMT, Anglo shares were up 2.5% to 515.50p, Anto shares were 1.7% higher at 518p and South32 was up 3.7% to 83.50p.