Freezing orders filed on Glencore PLC’s (LON:GLEN) two Democratic Republic of Congo (DRC) assets has prompted RBC Capital Markets to downgrade the mining company’s stock.
RBC has moved its rating to ‘outperform’ from “top pick’ as the freezing of assets “complicates the DRC picture for Glencore”.
READ Filing of freezing orders against Mutanda+Kamoto
RBC has cut its price target to 410p from 460p.
“Although we reduce recommendation and target price, our analysis suggests there is already a substantial amount of DRC risk in the price. Volatility is likely to remain high but we remain confident with an Outperform recommendation,” the Canadian broker said.
Assuming Glencore's DRC assets halt production, the impact on the copper market is likely to be large, RBC predicted.
Its analysis suggests the lost ;60k tonnes of copper will shift the copper market into deficit for 2018. After stripping out the DRC assets from Glencore it calculates there will be US$0.25/lb move in the copper price, which would increase Glencore’s underlying earnings (Ebitda) by US$700m, which would offset nearly half of the DRC impact in RBC’s worst case scenario.
“A worst case scenario of zero value for the DRC would still leave Glencore shares inexpensive in our view. Our numbers importantly do not include any impact from higher copper prices. Without the DRC, we would expect a premium rating could return to Glencore as its marketing business provides lower earnings volatility,” RBC said.
Liberum Capital Markets, meanwhile, reiterated its ‘sell’ recommendation.
“Glencore is contesting the charges but the DRC government are clearly being far more aggressive than in previous years with the mining companies and the assets, which will contribute 13% of spot EBITDA in 2019 when KCC [Kamaoto Copper Company] has ramped up, are in jeopardy,” the broker said.
Shares in Glencore were down 3.1% at 357.65p in mid-morning trading, making them the worst performing FTSE 100 constituents.