Jefferies ups BHP Billiton to 'buy', says mining sector fundamentals have improved

Jefferies upped its recommendation on BHP Billiton to ‘buy’ from ‘hold’ as it took a look at the metals and mining sector.

The bank said it had been cautious on miners due to weak demand, ongoing supply growth, stretched balance sheets, and a lack of free cash flow for most mining companies.

However, it said on Tuesday that demand has stabilised, supply is declining in most cases, balance sheets have strengthened due to FCF and asset sales, and valuations are inexpensive.

“Fundamentals have clearly improved,” Jefferies said.

The bank upgraded BHP on valuation, commodity exposure and better-than-expected free cash flow growth potential.

“Higher than expected prices for high grade (62% Fe content) iron ore fines, an improving outlook for high grade lump ore, an increase to our coking coal price forecasts, and our expectation for a recovery in the oil price have driven the upgrade,” Jefferies said, adding that BHP and buy-rated Rio Tinto are its top picks.

“BHP is a low cost producer with low operational risk, low geopolitical risk, good long-term growth potential and relatively high free cash flow through the cycle. We would buy BHP Billiton shares at the current level.”

At 0905 BST, BHP shares were up 2.5% to 1,059.50p.