JPMorgan downgrades Anglo American, cites poor risk/reward

JPMorgan Cazenove downgraded its stance on Anglo American to 'neutral' on Wednesday, exiting its three-year conviction 'overweight' on the stock as it highlighted three reasons for the move and recommended a tactical short Anglo versus long Glencore into first-half results in July/August.

JPM said three interconnected risks give a poor risk/reward over the next six to 12 months.

"First, Anglo's valuation no longer looks cheap and it is most expensive of the diversifieds on free cash flow yield (2% 2020E) and price-to-earnings ratio (13x). Second, Anglo is at risk of a $0.9bn cut to 2020 EBITDA (-20% cut to earnings) in the event Minas Rio does not receive a required Brazilian tailings permit by YE’19.

"Third, Minas Rio permitting uncertainty is likely to constrain capital returns at H1’19 results on 25th July, which is already weakest of the UK diversifieds."

JPMorgan said it remains positive on miners despite significant re-ratings since December 2018. Its order of preference is Rio Tinto (OW), Glencore (Neutral), Anglo (Neutral), and BHP (UW).

It lefts it 2,300 price target on Anglo unchanged.

At 1245 BST, Anglo shares were down 2.8% to 2,105.05p.