Be Warned Metals Investors: Deutsche Bank Just Moved To The Sidelines
Deutsche Bank’s Jorge Beristain mentioned that although commodity prices had rallied year-to-date, supply cuts are required across most commodities, while companies need to focus on reducing debt levels.
The commodity price rally year-to-date has been driven by incrementally positive data from China. This trend is unlikely to continue, analyst Jorge Beristain commented, while adding that supply cuts were needed across most commodities.
The good news is that the higher commodity prices had resulted in a significant tightening of credit spreads, which had opened “a window of opportunity.” Beristain expects further equity issuances and debt refinancing going ahead, “as the sector continues to re-shape.”
Barrick Gold Corporation (USA) (NYSE: ABX) – downgraded from Buy to Hold.
Barrick’s performance has been sluggish following its decision to acquire copper producer Equinox Minerals for $7.4bn in April 2011. Beristain mentioned, however, that Barrick had taken “significant steps to restructure its portfolio and streamline its operating model.”
The company made several asset sales to reduce debt and achieve its $3bn target for 2015. It has planned a $2bn debt reduction for 2016.
Hecla Mining Company (NYSE: HL) – downgraded from Buy to Hold.
“The company's primary growth initiative is the development of the #4 Shaft at Lucky Friday which could increase output from ~3m oz to ~5m oz and extend mine life beyond 2030,” Beristain wrote. The downgrade is based on valuation and the Hold rating reflects a balanced risk-reward.
Pan American Silver
Pan American Silver Corp. (USA) (NASDAQ: PAAS) – downgraded from Buy to Hold.
“Pan American's medium term outlook depends on continued cost reduction efforts and successful execution of brownfield expansion at La Colorada and the Dolores Pulp agglomeration,” the analyst comment. The company has a robust balance sheet, which offers it significant flexibility to pursue acquisitions, which could translate into substantial value for its shareholders.
The downgrade is based on valuation and the Hold rating reflects a balanced risk-reward.
Coeur Mining Inc (NYSE: CDE) – downgraded from Hold to Sell.
“Management has partially transformed Coeur in terms of its balance sheet and asset quality. The near term outlook is dependent on steady state operations at Kensington and Palmarejo and the brownfield expansion at Rochester,” the Credit Suisse report noted. The downgrade follows the recent run up in the company’s shares.
Reliance Steel & Aluminum Co (NYSE: RS) – downgraded from Buy to Hold.
“The company's focus on small, quick turnaround orders, value-added processing and opportunistic growth/diversification strategy has enabled it to maintain industry-leading "through the cycle" operational performance,” Beristain mentioned.
He added that Reliance had attractive end-market exposure, was likely to generate robust FCFs, had a healthy balance sheet and its long-term organic and inorganic growth potential was significant. The downgrade in rating is based on valuation.
Nucor Corporation (NYSE: NUE) - downgraded from Buy to Hold. The price target has been raised from $48 to $50. The analyst wrote, “Despite the company's leverage to NA construction market recovery, favorable cost position and investment grade balance sheet, we rate Nucor a Hold on valuation.”
Freeport-McMoRan Inc (NYSE: FCX) – Rated Hold. The price target has been raised from $6 to $9. Freeport’s O&G portfolio is now “evenly split between mature cash-flowing California assets and high growth, long life, Gulf of Mexico (GoM) assets,” the Credit Suisse report stated.
Beristain added, however, that declining O&G prices had exerted pressure on the company’s balance sheet, despite efforts like equity issuance, stake sale and reduction in costs and capex.
AK Steel Holding Corporation (NYSE: AKS) – Rated Sell. The price target has been raised from $1 to $2.
On September 16, 2014, the company completed the acquisition of Severstal's Dearborn integrated plant for $690m in cash, funded through a combination of debt and equity. The deal expands AK Steel's annual steel shipping capacity, provides scale and operational flexibility and strengthens the company’s position in the automotive grade steel market.
“However, we rate AK Steel a Sell due to higher cost structure and Balance Sheet risks,” Beristain said.
Steel Dynamics, Inc. (NASDAQ: STLD) – Rated Buy. The price target has been raised from $23 to $25.
On September 16, 2014, Steel Dynamics completed the acquisition of Severstal's Columbus mini-mill for ~$1.7bn in cash. The deal expanded Steel Dynamics’ annual steel shipping capacity by ~40 percent to 11m tons. “We rate Steel Dynamics a Buy, citing industry-leading cost structure, attractive product mix and exposure to recovering construction market,” the analyst wrote.
United States Steel Corporation
United States Steel Corporation (NYSE: X) – Rated Sell. The price target has been raised from $4.50 to $8.
“US Steel has been swift in tackling recent headwinds (depressed oil prices, elevated inventories and high imports), by undertaking maintenance outages and idling/adjusting production rates across other facilities,” Beristain mentioned. He added, however, that the company’s efforts to reduce costs have been insufficient to offset the impact of lower pricing and reduced volumes.
Allegheny Technologies Incorporated (NYSE: ATI) – Rated Hold. The price target has been raised from $10 to $13. The company produces niche products and has exposure to differentiated end-markets, such as aerospace and defense, chemical processing, oil & gas and power generation.
Century Aluminum Co (NASDAQ: CENX) – Rated Hold. The price target has been raised from $6 to $7.
Beristain expects the company to produce ~740k tons in 2016. Moreover, Century Aluminum has a carbon anode facility in Netherlands and a 40 percent stake in a plant in China. The analyst expressed concern, however, regarding an anticipated decline in the company’s earnings through 2016 to 2018, due to commodity price headwinds.
Latest Ratings for ABX
|Oct 2016||Mackie Research||Upgrades||Sell||Hold|
|Oct 2016||Goldman Sachs||Maintains||Buy|
|Oct 2016||Deutsche Bank||Upgrades||Hold||Buy|
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