UBS has upgraded its recommendation for mining company Glencore PLC from 'neutral' to 'buy', maintaining its price target at £5.60 per share.
The stock has underperformed by more than 10% compared with rivals Rio Tinto PLC (LSE:RIO) and BHP Group Ltd (LSE:BHP, ASX:BHP), falling approximately 26% from its January high.
The Swiss investment bank cites the company's attractive risk-reward prospects following the recent sell-off.
UBS analysts believe that concerns over further softening in thermal coal and curtailing of cobalt production are now priced into the stock.
They prefer Glencore to Rio Tinto, BHP, and Anglo American PLC (LSE:AAL), which currently have 'sell' ratings.
The bank is optimistic about Glencore's medium-term commodity mix, restructuring, and organic growth options (including projects such as Cobar, Volcan, and Viterra (TSX:VT)), as well as its robust near-term free cash flow (FCF) generation and disciplined capital management.
The mining company's FCF yield is estimated at around US$10 billion or 14% at spot, dropping to approximately 11% if the Newcastle Coal (NEWC) price stabilizes at around $150 per tonne in 2023. While UBS remains cautious about the mining sector overall, it is encouraged by recent stronger-than-expected data from China.
Thermal coal demand remains weak, and inventories are elevated, but supply disruptions persist. The spot NEWC 6000kcal coal price has dropped significantly from $400 per tonne in December to around $174 per tonne. UBS sees downside risk to its thermal coal price forecasts for 2023/24, although the high-calorific value Newcastle price should find support at around $150 per tonne due to supply disruption and tight global liquefied natural gas markets.
Glencore is set to report its March quarter production on April 26, with the potential for the company to trim cobalt volumes due to inventory buildup across the industry. UBS also expects the June 2023 dividend to be potentially topped up by as much as $5 billion, thanks to strong FCF in the first half of the year, likely working capital release, and potential disposals.
The bank sees the possibility of Glencore exiting Viterra (TSX:VT) in 2023/24, boosting cash returns by $7-10 billion. However, the exit is considered unlikely within the next six months as Glencore seeks to maximize value after delivering synergies from Gavilon.
UBS asserts that Glencore remains well-positioned against peers and offers superior cash returns, with the risk-reward prospects again attractive following the recent underperformance.