Jefferies downgrades Anglo American to 'hold'

Jefferies downgraded Anglo American to ‘hold’ from ‘buy’ on Thursday and slashed the price target to 2,700p from 3,200p after BHP abandoned its £39bn pursuit of the London-listed miner as the deal structure couldn’t be resolved.

"BHP has been unsuccessful in its attempt to acquire Anglo American as structural problems relating to inter-conditional demergers of Kumba and Amplats were too substantial to overcome," Jefferies noted.

"Now it is on the Anglo management team to execute on its own announced restructuring plan. While we see significant upside to Anglo's share price in the longer term, we downgrade AAL to hold based on the risk of value leakage and delays as the Anglo break-up progresses."

Jefferies said Anglo had been "rightfully adamant" in its view that the deal structure proposed by BHP was problematic due to risks relating to inter-conditional demergers of Kumba and Amplats.

"These risks included economic considerations as well as regulatory concerns," the bank said. "The question, then, was whether BHP would either make a proposal that would adequately compensate Anglo to accept these risks or agree to a new structure in which BHP would manage the demerger/ disposal of these Anglo subsidiaries on its own after a deal with Anglo would close.

"It is clear based on statements from both companies today that they could not come to an agreement on deal structure as BHP requested an extension of today's PUSU deadline, and Anglo rejected that request."

Jefferies said "this deal is dead for now, in our view" and that Anglo must now execute on its own proposed restructuring, which includes a demerger of Amplats, a sale or demerger of De Beers, a sale of the met coal business, and a review of the nickel business for sale or to be put on care and maintenance.

It said that in theory, this strategy can unlock sum-of-the-parts value and lead to an Anglo share price in the £30.77-£32.59/share range. However, this depends on Anglo's ability to execute on the "complex" strategy without significant value leakage, Jefferies said.

The bank sees the greatest risk in the sale of De Beers as diamonds may be in a structural decline and an IPO - if there is no trade sale - would likely be done at a low valuation.

"There is also risk in the sale price of the met coal business, which is near an operational trough, and the Amplats demerger will be complex as well," it said.

"The timing for Anglo to complete its restructuring plans is also a risk as these measures will likely take longer than expected (we believe this process won't be complete for at least 18 months)."

Jefferies said that with BHP walking away, it would expect Glencore to sit on the sidelines unless Anglo American "becomes more vulnerable again in the future".

Of the major diversified miners, Glencore is now the bank’s top pick. It also continues to like Rio Tinto.

UBS also cut its rating on Anglo shares, to 'neutral' from 'buy'. It said there is upside on a sum-of-the-parts but this will take time to realise.

The bank, which lifted its price target to 2,750p from 2,500p, said: "We now see the commodity price risk reward as more balanced."