Redburn has downgraded ratings for three UK miners on valuation grounds in a sector review in which it highlights a “serious flaw in the optimism recent share price gains imply”.
The influential City broker cut its stance on blue-chip players Anglo American PLC (LON:AAL) and BHP PLC (LON:BHP) both to ‘sell’ from ‘neutral’, with 23% and 18% downsides to raised valuations of 1,513p from 1,430p and 1,419p from 1,333p, respectively.
READ: BHP shares retreat as latest production numbers underwhelm
Meanwhile, Redburn downgraded FTSE 250-listed KAZ Minerals PLC (LON:KAZ) to ‘neutral’ from ‘buy’, with a 5% downgrade to their reduced valuation for the stock of 579p, down from 609p previously.
However, the broker said KAZ remains preferable to Antofagasta (LON:ANTO), the most overvalued UK mining exposure under the broker’s coverage.
In the note to clients, Redburn’s analysts pointed out: “In 2019 so far, several factors have helped to raise mining share prices: China stimulus hopes, a perceived softening of trade war rhetoric and Quantitative Tightening (QT) risks, and the potential for tighter regulation of tailings dams to threaten supply following Vale’s recent tragedy.”
However, they added, having examined those issues in detail they find a fundamental flaw in the optimism as, despite these factors, they still expect growing market surpluses for every major industrial commodity until at least 2021.
The analysts continued: “While it is often claimed that the mining industry has underinvested and supply shortages must be imminent, this is not supported by bottom-up analysis, which implies universally robust production growth in coming years.
“For example, we raise our copper supply forecasts and model 1mt of oversupply by 2021, versus 0.6mt in prior estimates, despite assuming targeted China stimulus.”
Expect gradual market disappointment
The Redburn analysts pointed out that they argued in a sector review in September 2018 that the challenging outlook was discounted and they upgraded their ‘sell’ ratings on the mining majors to ‘neutral’, but they have now withdrawn that stance with share prices around 20% higher.
They concluded: “Against consensus, we expect gradual market disappointment in coming months as the reasons for recent optimism prove weak, while market surpluses become more evident.”
In late morning trading, Anglo American shares were .8% lower at 1,952.80p, while BHP shed 1% at 1,709.60p, and KAZ Minerals lost 1.1% at 622.20p.