Berenberg lowers target price on 'favoured diversified pick' Anglo American

Berenberg noted that Anglo American's shares sold off by roughly 9% on Thursday, driven by a mixture of production guidance cuts and cost increases, and noted that management's announcement offered "few bright spots", with diamonds the only key area of the business that was untouched by the downgrades as iron ore, copper, platinum group metals, metallurgical coal, and nickel all taking "a haircut" in one way, shape or form.

"Production downgrades were made in iron ore, PGMs and metallurgical coal, with weather, availability of equipment and labour, geotechnical and geological challenges, and safety issues all playing their parts in driving these cuts," said Berenberg.

The German bank added that weaker production guidance was a contributor to higher costs, with lower volumes affecting fixed-cost absorption which, as a result, acted as a headwind. The impact of stronger FX and cost inflation combined to drive an approximately 9% cost increase versus previous guidance.

"In summary, the market does not like negative surprises and this was one – hence the shares took a fairly sharp downward move in response," said the analysts.

However, Berenberg stated that Anglo remained its "favoured diversified pick", with attractive greenfield and brownfield growth, an appealing commodity mix that it sees as well placed to benefit from current flow dislocations, in turn supporting strong mark-to-market upside.

Berenberg, which stood by its 'buy' rating on Anglo American, pointed out that the stock was trading on 1.78x net asset value and 3.8x earnings before interest, tax, depreciation, and amortisation.