HSBC has upgraded FTSE 100 miner Rio Tinto PLC (LON:RIO) to Buy from Hold as it made valuation changes to seven London-listed mining companies.
The London-based bank said the quality of Rio Tinto’s Pilbara iron ore assets offset its lack of portfolio diversity, as well as anticipating share buybacks due to the company having “the sectors strongest balance sheet”.
READ: Exane BNP Paribas cuts Rio Tinto to ‘neutral’ from ‘outperform’ after re-rating, has marginal preference for BHP Billiton
However, HSBC also cited the group's struggling copper business, most notably its interest in Grasberg, which is “under constant threat” from plans by the Indonesian government to indigenise the ownership structure.
Aside from the Indonesian situation, HSBC also cited declines in global steel production and worse-than-expected commodity prices as potential downside risks.
Upgrades and target price rises for South32, Anglo American, and BHP
Rio Tinto wasn’t the only one seeing good news, as South32 Limited (LON:S32) was also moved up to Buy from Hold, as HSBC cited the company’s focus on conversion of resources into reserves and high exposure to positive movements in aluminium prices.
However, the bank also saw several potential downside risks for South32, including weak commodity prices, FX fluctuations, potential failure to deliver cost savings, and any M&A’s that could be “potentially value destructive”.
Aside from upgrades, the bank upped its target prices for both FTSE 100-listed companies Anglo American PLC (LON:AAL) to 1,690p from 1,660p, and BHP Billiton PLC (LON:BLT) to 1,610p from 1,480p.
For Anglo American, HSBC cited higher US dollar commodity price forecasts as a positive in its valuation, with South African political risks and lower proceeds from asset sales as key potential downsides.
Meanwhile, the bank saw higher coal and nickel prices as well as a better-than-expected realisation of US shale assets as an upside for BHP, with a poor outcome of its Samarco dam failure litigation as a possible risk.
KAZ Minerals knocked down to Reduce
It wasn’t all good news for the miners though, as HSBC slapped a downgrade on FTSE 250-listed KAZ Minerals PLC (LON:KAZ), moving it to Reduce from Hold.
In its investment case, the bank cited the company’s net debt of US$2.7bn at the end of December 2017 as holding back any potential returns, saying “it will be a few years before it can contemplate any returns to shareholders”.
HSBC also swung its axe at FTSE 100-listed miners Antofagasta PLC (LON:ANTO) and Glencore PLC (LON:GLEN), cutting their target prices to 750p from 760p and to 450p from 460p respectively.
The bank said Antofagasta “will not be in a position to increase shareholder returns in the short to medium term”, due partly to a decline in grades in its copper production.
For Glencore, HSBC cited the group’s lesser quality assets and exposure to riskier jurisdictions such as Russia and the Democratic Republic of Congo as the key reasons for trading at a discount to BHP and Rio Tinto.
In late-morning trading Wednesday, Rio Tinto shares were up 2.8% at 3,883.5p, South32 was up 4.3% at 206p, Anglo American was up 2.5% at 1,741.4p, BHP was up 2.3% at 1,481.2p, KAZ Minerals was up 3% at 913.6p, Antofagasta was up 2.1% at 966p, and Glencore was up 2.6% at 356.7p.