Ferrexpo PLC (LON:FXPO) should benefit from record pellet premiums and elevated iron ore prices in 2019, according to Deutsche Bank.
However, the German investment bank downgraded its recommendation on the iron ore pellet producer to ‘hold’ from ‘buy’ following a strong rise in the share price in the year to date.
Deutsche Bank raised its target price on the shares to 325p from 310p as it increased its estimates for Ferrexpo’s earnings (EBITDA) by 26.5% to US$952mln in 2019 and by 21.1% to US$666mln in 2020, supported by an expected increase in iron ore prices.
READ: Ferrexpo whips up cash as production and iron ore prices ride high
“Pellet premiums for 2019 have been settled about US$10 per tonne higher compared to 2018 levels, we forecast free cash flow yields of over 20% in 2019/20 (about 25% at spot) and by early 2020 FXPO could be close to debt free,” Deutsche Bank said.
“The deleveraging of the balance sheet provides greater scope for the company to progress its brownfield expansion plans to grow pellet production from a 2020 target of 12mln tonnes per annum (mtpa) to a longer term target (2025+) of 20 mtpa.”
Deutsche Bank lifts target price on Rio Tinto
The bank also expects Rio Tinto PLC (LON:RIO) earnings to receive a boost from higher iron ore prices as it lifted its target price to 5,200p from 4,700p.
But Deutche Bank maintained a ‘hold’ rating on the stock, noting that Rio has cut its iron ore production guidance twice this year due to operational challenges in the Greater Brockman hub in Western Australia.
“Despite operational set backs in the first half, the group is expected to deliver the highest half yearly EBITDA since the first half of 2014 due to elevated iron ore prices,” it said.
“Rio reported a small net cash position at the end of 2018 however we expect this to move to a net debt position of US$4bn due to the US$4bn special dividend paid in the first half of 2019 relating to disposal proceeds received in 2018, a US$1.2bn increase due to new lease accounting rules, a US$0.9bn tax payment in relation to disposal proceeds and some upward pressure on receivables (high iron ore prices).”
Anglo American remains 'top pick'
Deutsche Bank said Anglo American PLC (LON:AAL) remains its top pick as it thinks the stock offers the “best combination of earnings resilience, attractive valuation and peer leading structural growth.”
The bank kept its ‘buy’ recommendation on Anglo and increased its target price to 2,500p from 2,450p.
Anglo’s Minas Rio project in Brazil requires an operating licence by the end of this year or early 2020 in order to expand its tailings facility and maintain current production levels, Deutsche Bank noted.
“While this has created a degree of uncertainty near term, receipt of the necessary licenses should be a positive catalyst later this year (we think most likely to be received in Q4),” the bank said.
It expects Anglo to top up the ordinary dividend in 2019 via either a buyback or special dividends, supported by low levereage3 is low and cash flows from the Kumba mine in South African will be “exceptionally strong” in the first half.
Glencore to post weak first half
Deutsche Bank also has a ‘buy’ rating on Glencore PLC (LON:GLEN) but cut the target price to 300p from 370p as it expects a weak set of first half earnings due to lower base metal and thermal coal prices, lower by products like cobalt, provisional pricing adjustments and non-cash market-to-market losses.
"We do not anticipate any changes or top-ups to the dividend or buyback given lack of divestments to date and pressure on cash flows from lower coal and metal prices," the bank added.