Anglo American slumps again; Jefferies says equity issuance may still be needed

Shares in miner Anglo American skidded for the second day in a row after it said on Tuesday that it plans to scrap its dividend for this year and the next and axe jobs amid a “radical” portfolio restructuring to combat falling commodity prices.

Jefferies downgraded its stance on the stock to ‘underperform’ from ‘hold’ and took an axe to the target price, chopping it to 275p from 635p.

It said aggressive portfolio management, opex and capex reductions and the suspension of the dividend were all steps in the right direction.

“However, the downside risk to commodity prices is still significant, and further action, including an equity issuance, may still be necessary in 2016. Despite the recent selloff, we downgrade.”

Societe Generale said investor sentiment is unlikely to reverse anytime soon and barring a sector rally, at this stage there is likely more downside risk than upside to the shares.

The bank said that if an equity issuance is the ultimate choice, waiting any longer would mean more dilution.

“Management also needs to be mindful that at current market capitalisation ($6.2bn), AA is likely to be on the radar of companies looking for good assets overshadowed by distressed balance sheets,” it added.

Meanwhile, JPMorgan Cazenove said the measures announced do not go far enough to challenge its fundamentally bearish view on the stock.

“Specifically, in the absence of higher commodity prices, a significant reduction in net debt from around $13bn at YE’15 (34% gearing) will only be achieved by a more aggressive expansion of disposal candidates,” it said.

Credit Suisse said that without a more structural shift in the portfolio, the balance sheet and cash flow concerns will persist.

“In our view the company has a 12 month window to execute on sales and improve cash flows; otherwise pressure on debt levels and raising equity will increase further,” it said.

Citigroup said the measures announced were largely in line with market expectations, but a bit too late and “seemed like a reactionary measure rather than proactive”.

At 1142 GMT, Anglo shares were down 9% to 294.35p. The stock is down 75.6% year to date.