Morgan Stanley lifts stance on European miners; bumps up BHP, Rio and Anglo

London-listed miners Rio Tinto, BHP Billiton and Anglo American got a boost on Wednesday after Morgan Stanley upgraded its stance on all three stocks, as it lifted its view on the European metals and mining sector to ‘attractive’ from ‘in line’.

As far as the sector as a whole is concerned, it said stable data from China in the last few months with a potential uplift from recent financial and administrative stimulus policies should increase conviction that the 19% commodity price uplift by 2017 in the bank’s base case deck is achievable.

“That would be a sharp reversal from the experience in the last 18 months. This should trigger a tactical re-rating of the sector.”

In addition, JPM pointed out that the sector is supported by a historically attractive valuation.

The bank lifted Rio Tinto to ‘overweight’ from ‘equalweight’, with an unchanged price target of 2,580p.

JPM said Rio is actively recycling capital with disposals of coal assets and re-investment in copper projects in Mongolia. It also said the company’s financial leverage remains low on both spot prices and the bank’s base-case forecasts.

“It also continues to generate freecash flow on spot. The base dividend is its main priority after safety/maintenance capex followed by reinvestment for growth and growth projects.”

JPM upped BHP Billiton to ‘overweight’ from ‘equalweight’, keeping the price target at 1,200p.

It said a strong balance sheet should allow the company to keep paying the dividend of $1.21 per share and invest $7-8bn per year for another 18 months.

However, JPM said it needs higher commodity prices to sustain these three things simultaneously beyond that period of time.

Finally, the bank lifted Anglo American to ‘equalweight’ from ‘underweight’, with a maintained target price of 680p.

It noted that Anglo is de-risking operations and de-levering its balance sheet. JPM said this is reducing net debt, but to future-proof the balance sheet it expects the dividend to be cut too.

“Net debt drops to $12.3bn for 2016 on spot or 2.3x net debt to EBITDA. Firmly investment grade territory and allowing the company to ride out the cycle.”

At 0955 BST, Anglo American shares were up 10.1% at 665.60p, Ro Tinto was 7.4% higher at 2,485.50p and BHP Billiton was up 4.2% at 1,103.60p.

Meanwhile, the FTSE 350 mining index was up 5.7% at 9,948.16.