UBS downgrades Anglo American, says risk/reward not compelling

UBS downgraded Anglo American to ‘sell’ from ‘neutral’ saying the risk/reward was not attractive, but lifted the price target to 400p from 290p.

The bank noted the shares are up 137% from the low in mid-January, outperforming the sector by around 85%.

“We believe the outlook for Anglo's key commodity prices has not improved materially and the execution risk with the proposed restructuring remains high.

“Our key concern is that Anglo will struggle to sell coal, nickel and iron ore assets at attractive prices in the current market and thus, if they do, it could be destructive to shareholder value.”

UBS reckons Anglo will struggle to raise $7bn from disposals, but said the near-term target of $3-4bn by end of full year 2016 is possible.

In addition, it said the fundamentals for platinum and diamonds remain challenging and a material recovery in prices in the near term is unlikely.

“Platinum still lacks supply discipline and is being pulled up by gold, while we expect diamonds to be held back by high rough inventories and growing supply,” said UBS.

It added that Anglo's balance sheet is well structured, but vulnerable from full year 2018 if commodity prices are lower for longer.

The bank upped its price target with its net present value multiple lifted to 0.4x from 0.3x to reflect improved free cash flow generation and divestment progress.