Broker tips: Gem Diamonds, Glencore, KAZ Minerals

The bank said the investment thesis for Gem revolves around the Letseng mine in Lesotho.

It said the Ghaghoo mine in Botswana is a drag on valuation, consumes cash and will struggle to generate decent returns even on its written-down value.

“Letseng, on the other hand, continues to achieve sound prices and is moving into an area which should produce more large stones.

“But higher capex ($16.7m) for a new fleet workshop due to the pushback of the Satellite pit and near-term caution about rough prices have contributed to our lower price target and downgraded recommendation.”

RBC said the medium-term outlook for rough diamond demand and prices appears sound provided demand in China recovers.

In addition, it said the market for Letseng goods appears to be well-based and it sees relatively stable prices for the output.

Macquarie downgraded its recommendation on shares of Glencore to 'neutral', telling clients that the commodity trader's "impressive debt reduction is now largely priced-in".

However, analysts Alon Olsha and James Oberholzer bumped up their target price on the stock from 180p to 200p.

The company quickly set itself apart from its peers with its debt reduction plans, despite being greeted with some incredulity by markets, the analysts said. Just over ten months on no other outfit has slashed its gearing as quickly or by as much as Glencore and the scope for a further reduction remains high, Olsha and Oberholzer said in a research note sent to clients and dated 18 August.

"Indeed, we believe that management’s credibility has been restored and even burnished by solid execution of their realistic and value-preserving crisis plan."

Macquarie forecast the trader would be able to cut its net debt to $16.8bn for fiscal year 2016, to just below the company's guidance of between $17bn-$18bn. However, should the firm manage to hive off its Vasilkovskoye gold mine then net debt could fall to as low as $15.0-15.5bn.

For its part, the broker only expected a streaming deal for Vasilkovskoye.

Nevertheless, following the sale of an approximately 10% stake in agricultural unit disposals has dried up. That was in part a result of improved market conditions and thus better free cash flow, which meant the pressure on Glencore to divest assets had lessened, according to the analysts.

"Nevertheless, fewer asset sales reduce the number of stock catalysts and limit the scope for guidance-beating debt reduction, in our view."

With a view to the company's interims on 24 August, Macquarie said the key areas to focus on would be its marketing EBIT guidance, an update on asset sales and guidance on when it expects to resume the roughly 500kt of zinc output cut last year.

The latter would be be important to influencing zinc market sentiment and the outlook for fiscal year 2017 earnings, Macquarie said.

Credit Suisse upgraded KAZ Minerals to ‘outperform’ from ‘neutral’ and lifted the price target to 250p from 165p saying development risks are receding.

“Our concerns around KAZ have centred around execution risks at the two main growth projects and funding risks due to high levels of debt. Both are diminishing in our view and, alongside better than expected earnings we upgrade to outperform.”

CS said it remains cautious on copper prices over the next 12 months but pointed out that a third of KAZ revenues are from gold/silver/zinc, cash costs are low and copper production is set to double in the next two years.

The bank noted that the first of the two major projects, Bozshakol, is close to reaching commercial production, and the ramp-up has largely gone to plan.

Meanwhile, Aktogay has a very similar design and scale and the lessons learned from Bozshakol should lead to a similar ramp-up period through 2017.

“Cost performance at the projects and existing mines was better than expected in H116 and we have reduced our unit cost estimates over the forecast period (we previously had a buffer above company guidance).”

On Thursday, KAZ reported a rise in first-half earnings and said its new Bozshakol project is on track for commercial output in the second half.

For the six months to the end of June, the copper miner said core profit rose to $115m from $88m in the same period last year. Pre-tax profit surged to $91m fro $2m last year.

Although revenue fell to $302m from $341m, cost of sales declined to $170m from $282m and administrative expenses dropped to $51m from $71m.