Liberum downgrades mining stocks to 'sell', cuts copper forecasts

The recent re-rating in mining stocks and weak commodity prices has prompted Liberum to downgrade its recommendations on sector giants BHP Billiton, Glencore, Anglo American and Rio Tinto.

The broker lowered its ratings on all four from ‘sell’ to ‘hold’ and slashed target prices, saying that copper and iron ore prices are set to “crash”.

“We believe Dr Copper’s sustained fall in January is harbinger of falling global demand,” said analysts Richard Knights and Ben Davis.

Copper is often referred to as ‘Dr Copper’ due to the assumption that it can be used to predict economic trends.

Copper and iron ore, which together account for 55% of the sector’s operations profits, are likely to suffer as demand growth slows and Chinese real estate investment collapses, the analysts said.

“At a time of continued supply growth from the super cycle capex binge, we expect further price falls and downgrade our copper and iron ore 2015 forecasts by 19% and 9% [to $2.25 per pound and $58 per tonne, respectively].”

Knights and Davis said that the market is currently “mis-pricing” the risk in copper, as current valuations imply a fall in iron ore but a rise in copper.

“Given stocks have already rerated to trough multiples (20-30 times earnings), leaving no room to absorb negative earnings momentum, we downgrade the majors to ‘sell’,” they said.

Liberum made the following changes to target prices: BHP Billiton target cut from 1,439p to 1,200p, Rio target cut from 2,886p to 2,600p, Glencore target cut from 247p to 200p, Anglo target cut from 1,118p to 900p.