JP Morgan downgrades Glencore, Antofagasta; recommends selling rally

JP Morgan Cazenove reviewed its ratings on a number of metals and mining stocks as it took a look at the sector and recommended selling the recent rally.

The bank noted Chinese demand growth is slowing, oversupply is rising and previous super-cycles suggest spot prices could carry a further downside risk of around 33%.

“Our recommendations already reflect this bearish view, but as we move beyond typical Q1 seasonal demand strength and with the UK mining sector +42% from its January 2016 lows, we recommend selling the recent rally.”

It downgraded Glencore to ‘neutral’ from ‘overweight’ with a 130p price target, saying the agriculture unit stake sale brings to a close the catalyst-rich deleveraging story.

“GLEN retains a strong free cash flow profile and valuation does not look particularly expensive; however, we believe downside risk to copper and zinc prices will drive negative earnings momentum over the next few months.”

JP Morgan Cazenove downgraded Antofagasta to ‘neutral’ from ‘overweight’ and slashed the price target to 410p from 600p. It cut Kaz Minerals to ‘underweight’ from ‘neutral’ but lifted the price target to 125p from 105p and downgraded First Quantum Minerals to ‘underweight’ from ‘neutral’ but raised the price target to 300p from 140p.

The downgrades above reflect JPM’s view of copper price downside risk.

JP Morgan said China’s slowing commodity demand and significant expansion of supply in base metals, coal and iron ore over the past decade continue to push markets into oversupply that it expects to persist across 2016-17.

In addition, it said that despite weakening year-to-date, it expects the US dollar to remain relatively strong for the rest of the year, which is negative for the pricing power of commodity consumers.

“As a result, we expect commodity prices and producers’ earnings momentum to resume their decline and we believe prices for most commodities will need to trade into the cost curve to incentivise capacity closures.”

At 0940 BST, Glencore was up 1.1% to 141.60p, Antofagasta was down 0.5% to 436.20p, Kaz Minerals was down 5.6% to 151p and First Quantum was down 4.7% to 360p.