Goldman ups Anglo American to 'buy' from 'sell'

Goldman Sachs upgraded Anglo American to ‘buy’ from ‘sell’ and upped the price target to 1,400p from 400p.

The bank said it might seem odd to upgrade the stock after its 280%+ year-to-date share price rise.

However, it pointed to deleveraging, increased US pending and higher diamond demand.

GS said the free cash flow lift provided by higher commodity prices should see significant deleveraging. In addition, it said inflation and increased confidence in the US economy should see growing consumer spending on luxury items, leading to an increase in diamond purchases.

“This would be a big positive for Anglo as diamonds account for more than 20% of its 2017E earnings before interest, taxes, depreciation and amortisation."

Goldman said metallurgical coal and thermal coal have seen big price increases year-to-date. While the Chinese government has taken action on thermal coal no action has been taken on metallurgical coal, which represents more than 25% of Anglo’s 2017E EBITDA.

The bank reckons consensus is still not pricing in the full impact of commodity prices for this year and 2017, which could prompt a wave of upgrades.

As far as the stock’s valuation is concerned, it pointed out that Anglo is trading at a significant discount to its historical average and to peers.

GS said the much higher price target is a function of higher commodity price forecast for the next couple of years, significant FCF generation and a weaker GBP/USD rate.

At 0936 GMT, the shares were down 0.2% to 1,094.50p.