Deutsche Bank Downgrades Miners En Masse And Investors Are Running

• Shares of most companies in the metals and mining segment have been under pressure in 2015.
• Deutsche Bank's Jorge Beristain downgraded the ratings on several metals and mining stocks.
• Beristain noted that the balance sheets in this segment had reached distressed levels.

Analyst Jorge Beristain wrote, “Metals & Mining Balance Sheets have reached distressed levels via a toxic cocktail of years of deficit spending/poor M&A decisions meeting head-on with a China commodity demand slowdown.”

While huge capacity cuts are required, this could be slow due to the “momentum and magnitude of new projects still ramping, natural currency hedges in a number of producing countries, continued cost-cutting, barriers to exit and social goals such as maintaining employment in countries such as China,” the Deutsche Bank report noted.

AK Steel

Beristain downgraded the rating on AK Steel Holding Corporation AKS from Hold to Sell, while reducing the price target from $3 to $1. The analyst cited mounting balance sheet risks as the reason.

He added, “Free cash flow is expected to remain constrained over the next 2 years with the company forced to draw down on its revolver ($748m as of 3Q15) to fund part of its capex/interest expenses.”

The EBITDA estimates for 2016 and 2017 have been reduced by 74 percent to $109m and by 69 percent to $146m (-69%), respectively, to reflect lower steel price assumptions.

Cliffs

Beristain downgraded the rating on Cliffs Natural Resources Inc CLF from Hold to Sell, while reducing the price target from $3 to $1.50. The analyst cited the reasons as the company’s “strained Balance Sheet position and a scenario of constrained cash flows given ongoing weakness in iron ore market.”

The NPV estimate has been reduced from $2.7 to $2.1, mainly to reflect lower iron ore prices.

Foresight

Deutsche Bank downgraded the rating on Foresight Energy LP FELP from Hold to Sell, while reducing the price target from $6 to $2. Beristain cited the reasons as the uncertainty surrounding the $600m notes and distribution outlook.

The NPV estimate has been reduced from $10, which is based on DDM valuation, to $7, based on DCF valuation.

US Steel

Beristain downgraded the rating on United States Steel Corporation X from Hold to Sell, while reducing the price target from $13 to $5.

“Balance Sheet likely to be stretched with net debt expected to increase to $2.9bn in 2017E (vs $2.3bn in 3Q15),” the analyst wrote.

The EBITDA estimates for 2016 and 2017 have been reduced by 62 percent to $271m and by 45 percent to $556m, respectively, to reflect lower steel price assumptions. The revised price target reflects about 40 percent downside, Beristain noted.

Alliance

Deutsche Bank downgraded the rating on Alliance Resource Partners, L.P. ARLP from Buy to Hold, while reducing the price target from $30 to $15. Beristain cited the reason as mounting concerns over the sustainability of distributions, with the ongoing weakness in coal market exerting pressure on cash flows.

The NPV estimate has been reduced from $33 to $31, to reflect lower distribution growth.