Rio and Anglo downgraded as BarCap slashes commodity estimates

Mining giants Rio Tinto and Anglo American were under the cosh in London as analysts at Barclays Capital slashed their commodity prices forecasts and lowered their recommendations on both shares.

While acknowledging that the average institutional investor has very little interest in commodity price estimates given recent volatility, the investment bank highlighted that it has made downgrades virtually across the board.

"We have made the following changes to this year’s price forecasts (in order of magnitude): iron ore -24%, natural gas -16%, nickel -15%, coking coal -8%, thermal coal -7%. All others are <5% moves. The only upgrades are to copper and zinc - 1% each," BarCap said.

In light of these revisions, mining companies can and will protect their dividend yields, the bank said, though this will come at the expense of growth. Nevertheless, it still cut its earnings forecasts across the sector.

Among the diversified miners, only Glencore - BarCap's top pick - can cover its dividend from free cash flow. The bank also prefers Glencore due to its base metal exposure and "robust trading dynamics".

"Elsewhere valuations appear full, with average price-to-earnings multiple of the big four on 18.8 times for 2015 […] although in the context of broader market valuations this is less extreme. Clearly any form of recovery in base metal pricing would obviously see these multiples drop materially," BarCap said.

The broker downgraded its rating on Rio from 'overweight' to 'equal weight', cautioning that the company may struggle to continue combating the ongoing iron ore price freefall.

Meanwhile, Anglo was lowered from 'equal weight' to 'underweight' ahead of a "very difficult" first half given its commodity exposure.

First Quantum, BHP Billiton, Randgold and Vedanta were all left at 'overweight'.

Rio and Anglo were both trading around 2% lower by 09:31 on Tuesday morning.