Liberum upgrades miners after recent sell-off, but downside risks remain

After the recent falls across the mining sector, Liberum Capital has upgraded its rating on the category from 'sell' to ‘hold’, though the broker still sees plenty of downside risks in 2015.

Stocks on the FTSE 350 mining index have dropped by 20% this year on the back of macro-economic concerns, a slowdown in China and record supply growth in copper and iron ore.

Liberum has lifted its stance on Rio Tinto, Glencore and Anglo American from ‘sell’ to ‘hold’, while BHP Billiton was left at a ‘hold’, with share prices having reached its “once-bearish” targets.

“Even though we expect fundamentals to continue to weaken in 2015 on slowing Chinese investment demand and a strengthening dollar, we also expect the equities to re-rate to trough multiples,” said analysts Richard Knights and Ben Davis.

“Capex, cost and capacity cuts will continue, and should provide earnings and balance-sheet relief.”

Nevertheless, looking ahead the analysts said that they see “plenty of potential [for companies] to undershoot from here”.

They highlighted a “devastating and structural oversupply” created by the majors’ bulk commodity asset bases. Base metals remain sensitive to changes in Chinese demand, while currency movements also remain a “big unknown”.