Glencore rallies as JPMorgan hails new strategy

Glencore got a boost after JPMorgan Cazenove upgraded it to ‘overweight’ from ‘neutral’ with an unchanged price target of 160p, as it pitched the stock against rival Anglo American.

It pointed out that Glencore and Anglo American provided strategy updates last week.

“In our view, Glencore defined a credible strategy to generate $2.3bn of positive free cash flow in 2016, reverse balance sheet risk and create value for equity holders at spot commodity prices.”

It said the key surprise at the investor day was the extent of cost cutting in zinc, copper and coal, which drives a $2bn uplift in its 2016E EBITDA to $7.6bn at current prices.

“AAL’s outlook is less positive, it will generate -$1bn FCF and YE’16 ND/EBITDA will stretch to 3.8x at spot prices,” the bank said.

JPM said it estimates that Glencore is the only diversified miner with positive cash flow in 2016 at spot prices, adding that it is an interesting alternative to Rio Tinto.

JPM said it retains concerns over the long-term impact of aggressive cost cutting and the risk to Glencore’s balance sheet at lower prices, but decisive measures credibly mitigate the risk of dilution for equity holders.

“In contrast, AAL's excessive leverage means this risk should continue to grow as we head into 2016.”

JPM slashed its price target on Anglo to 265p from 450p and maintained the ‘underweight’ rating.

At 1111 GMT, Glencore shares were up 4.8% to 83.84p while Anglo was 1.6% firmer at 285.35p.