Investec downgrades BHP Billiton, Anglo American, Ferrexpo

Investec cuts its ratings on BHP Billiton, Ferrexpo and Anglo American and slashed its price targets, as it took a look at the mining sector, downgrading its commodity price forecasts.

“Current market conditions represent the perfect storm for commodities given that demand is falling, supply is rising, inventory levels remain stubbornly high and the US dollar stubbornly strong.”

Investec downgraded all three miners to ‘sell’ from ‘hold’ as it reduced its commodity price forecasts across the board. It cut its full year 2016 copper price estimate by 12.5% to $220 a pound, its gold assumption by 3.1% to $1,135 an ounce and silver by 4.4% to $15.24 an ounce.

“Given our revised commodity price deck and prevailing financial risks, including the fallout from the Samarco disaster and ongoing oil price weakness, we have taken the view that BHP Billiton will be forced to reduce its progressive dividend policy,” it said.

The brokerage, which chopped its price target on BHP to 581p from 943p, said it assumes a new dividend payment regime based on a 25% payout ratio on sustainable operating cash flows.

It said this would give a resilient minimum base for ongoing shareholder returns, while returning BHP Billiton to payout ratios similar to historical levels.

The brokerage reduced Anglo American’s target price to 152p from 402p, saying its updated, lower commodity price outlook, along with continued capex spend and a challenged balance sheet have led the to the downgrade.

Investec cut its target price on Ferrexpo to 16p from 32p, saying the reduced outlook for iron ore prices has a “devastating” effect on the stock’s valuation, notwithstanding the assumption of an ongoing $20/t premium on its pellet product.

Operating cash flow is still positive, but the net present value for the operations cannot offset the significant net debt position – over $0.8bn – such that Investec’s overall NPV estimate is negative.

Finally, Investec downgraded Acacia Mining to ‘hold’ from ‘buy’, bring the target price down to 170p from 211p, saying it remains cautious until the next earnings release.

Investec said Acacia’s valuation has fall back due to the production slip in the third quarter and expectations that output from Bulyanhulu will be lower than previously guided.

At 0943 GMT, BHP Billiton shares were down 6.5% to 586.40p, Anglo was off 5.6% at 225.55p, Ferrexpo was 14.3% weaker at 15p and Acacia was down 3.3% to 157.08p.