Deutsche Bank upgrades Glencore on EV exposure, downgrades Anglo American
Analysts at Deutsche Bank singled out Glencore and Rio Tinto even as they sounded a confident note on the metals and mining sector as a whole, telling clients that capital and supply discipline and a heightened focus on cash flows would allow the sector to re-rate over the medium-term.
That was despite the clear signs of a cyclical slowdown in the Chinese economy. However, in the same note they were careful to clarify that while they expected slowing demand for commodities in 2018, they did not anticipate a collapse.
They also pointed out that companies' poor capital allocation track record had also been a "major" factor behind large caps's de-rating against the market.
Against that backdrop, they recommended investors focus on two themes, cash-flow quality and commodity exposure.
In the specific case of Glencore, Deutsche Bank highlighted its exposure to copper and zinc and its latent capacity growth, while the main attractions of Rio Tinto lay in its valuation and cash returns.
Hence, the analysts upgraded their recommendation for shares of Glencore from 'hold' to 'buy' and lifted their target price from 300p to 420p.
Among the core drivers for Glencore identified by Deutsche Bank were, the highest exposure to the broker's preferred commodities which in turn were geared towards the market for electric vehicles (copper, cobalt and nickel), the likelihood of high and sustained cash flows out to 2020 and its latent capacity options in copper and zinc.
The latter meant it could keep organic volumes growing to 2020 and group capital expenditure levels contained.
Deutsche Bank on the other hand downgraded Anglo American from 'hold' to 'sell' due to its recent share price outperformance relative to its sector. However, it lifted its target price from 1,080p to 1,250p on the back of near-term earnings upgrades.
Nonetheless, they added: "Although cheap on near term multiples, high bulk exposure makes the company vulnerable to lower demand and prices in Q417 and 2018. We expect 2017 to be a peak for cash flows given declining prices and rising capex requirements over the medium term."