Investec downgrades Glencore as it reviews mining sector

Investec cut Glencore to ‘sell’ from ‘buy’ as it revised equity target prices on a number of mining stocks following further weakness in the Chinese economy and downgrades to its commodity price deck.

“The increasing problems in China have caused us to reassess our commodity price outlook. Having started the year with metal price forecasts well below consensus for nickel and platinum group metals, we acknowledge we were not bearish enough,” said Investec.

It said mining shares have reflected further weakness in underlying commodities and appear set for a fifth straight year of underperformance relative to wider equity markets. It noted that the major miners have underperformed the FTSE 100 by an average of 25% year-to-date.

Investec said earnings adjustments have meant downgrades for nearly all the companies under its coverage, in many cases leading to meaningful reductions in price targets.

The brokerage downgraded Glencore to ‘sell’ and slashed its price target to 147p from 282p, but retained its ‘hold’ recommendation on Rio Tinto, BHP Billiton and Anglo American. It said the former two still have the balance sheet capacity to maintain what is now an attractive dividend yield, while the turnaround at the latter is well underway.

On Glencore, it said: “We expect the company to take decisive action to restructure and adapt, but until such strategies are made known we have to assume status quo. The interims results expected on 19 August will give an update on the exact state of the business.”

Investec also cut its rating on Randgold Resources, to ‘hold’ from ‘buy’ and cut its price target to 3,872p from 4,971p, pointing to a weaker gold price outlook, although it said the company’s balance sheet remains resilient.

On the upside, the brokerage upgraded Ferrexpo to ‘hold’ from ‘sell’, noting that the company’s earnings have been lifted by a dramatic drop in operating costs. It trimmed the price target to 57p from 58p.

“We retain our view that the sector is unlikely to recover anytime soon, especially as signals from China appear to be deteriorating,” said Investec.