SocGen upgrades Rio and Glencore, but downgrades BHP Billiton

Societe Generale reviewed its ratings on Rio Tinto, Glencore and BHP Billiton as it took a look at the metals and mining sector, which it rates at ‘neutral’.

The bank lifted Rio Tinto to ‘buy’ from ‘hold’, albeit with a lower price target of 2,450p from 3,100p. It said the stock combined cash flow and balance-sheet resilience with an attractive valuation in both a spot and SocGen base-case scenario.

SocGen said iron ore has proven more resilient than it expected, with prices solidly anchored at $55 a tonne against market expectations of a crash below $50.

It upgraded Glencore to ‘buy’ from ‘hold’, saying fears of bankruptcy are overblown and the stock is undervalued. It cut the price target to 130p from 175p.

SocGen said it understands concerns about the company seeing its ‘Lehman moment’, but reckons the analogy is stretched. It noted that Glencore’s trading operations involve less risk than often perceived and are underpinned by a combination of low-risk letter-of-credit financing and committed credit line facilities.

“Even assuming 10% decline in all commodity prices, we still see it generating solid free cash flow with yield to equity in excess of 16%, enabling the company to dramatically deleverage with net debt/EBITDA reduced to 2.0x by 2018.”

Finally, SocGen downgraded BHP Billiton to ‘hold’ versus ‘buy’ as it trades on demanding 2016 multiples and could see its balance-sheet strength tested if management sticks to its current dividend policy. The bank slashed its price target on the stock to 1,050p from 1,600p.

“We appreciate the group has the flexibility to further lower capex if need be, but this would be at the expense of future growth at a time when it needs to stem the decline in Petroleum and approve key projects in the mineral business.”

At 1000 BST, Rio Tinto shares were up 2.6% at 2,301p, Glencore was 6% higher at 100.65p and BHP Billiton was up 1.8% at 1,059.50p.