Goldman Sachs takes axe to mining stocks

Goldman Sachs adjusted its ratings on metals and mining stocks on Tuesday as it adopted a tactically bearish stance.

The bank downgraded BHP Billiton and Antofagasta to 'sell' from 'neutral' and cut their price targets to 1,100p from 1,400p and 650p from 800p, respectively.

Its downgrade of BHP reflects a bearish view on iron ore, which is around 41% of the company’s FY18 earnings before interest, taxes, depreciation and amortisation.

"This should see BHP’s earnings profile/free cash flow generation impacted and drive consensus downgrades in our view. In addition, it pointed to FCF generation from the oil business, noting that while its commodities team remains positive on the oil price, BHP’s oil business is barely generating FCF."

As far as Antofagasta is concerned, it said the 'sell' case is predicated on near-term downside risk to copper prices.

GS's economists reckon China is looking to tighten its monetary policy, which should have an impact on commodity demand. Also, with Escondida back online, the Grasberg issue being resolved and the reflation trade coming increasingly in question, the copper price rally could unwind, it added.

It downgraded Anglo American to 'neutral' from 'buy' and slashed the price target to 1,100p from 1,500p. GS said its upgrade in November was based on the belief that higher commodity prices, particularly iron ore and coal, would see significant FCF generation, which would lower net debt and result in a transference of value from debt to equity holders.

"This thesis held until mid-March, when the rebar price in China came under pressure, having a knock-on effect on the iron ore price (both are down c.25% from their highs).

"With the commodity price outlook increasingly bearish, we believe that Anglo’s shares are likely to remain under pressure over the near term."

Finally, Goldman removed Vedanta Resources from its Conviction List and cut the price target to 950p from 1,450p, but kept the stock at 'buy'.

The bank said that over the past two months, the stock has underperformed, paring all of its gains as sentiment towards mining has turned negative, with the market focusing more on Chinese tightening, which has seen rebar prices in China fall, with a knock-on effect on zing.

At 1000 BST, BHP shares were down 0.6% to 1,207p, Antofagasta was down 1.8% to 825.28p, Anglo was off 1.6% to 1,111.50p and Vedanta was down 2% to 694p.