UBS downgrades BHP and South32, ups Anglo

UBS downgraded BHP Billiton to ‘neutral’ from ‘buy’ as it took a look at the mining sector, lifting the price target to 1,300p from 1,200p, saying the risk/reward was now balanced after a strong recovery in the share price.

It noted the stock is up 63% year-to-date, outperforming Rio Tinto by 28%.

“In our opinion, the risk/reward is more balanced as we expect iron ore and coal prices to fall back over the next 3-6 months, and oil prices to be stable,” the bank said.

UBS said it still believes BHP is well positioned to generate robust free cash flow in a challenging price environment, with well-invested assets supported by a relatively attractive mix and savings from the new streamlined structure.

The bank also downgraded South32 to ‘neutral’ from ‘buy’ on the near-term price outlook, but upped the price target to 155p from 130p.

Again, it said the risk/reward is now more balanced following a share price rise of 194% year-to-date.

“The risk/reward is more balanced as we expect coal and manganese prices to fall back over the next three to six months with spot FCF yield to fall from around 15% currently to around 10% on the UBS price deck.”

In addition, it said the stronger rand was becoming a meaningful headwind.

UBS upgraded Anglo American to ‘neutral’ from ‘sell’ and lifted the price target to 950p from 740p saying strong FCF and deleveraging reduces the risk of asset disposals at bottom of the cycle prices.

At 0920 BST, BHP shares were up 0.5% to 1,273p, South32 shares were up 6% to 158.50p and Anglo was up 0.7% to 1,049.50p.