Mining The Metals Sector: Deutsche Bank Updates 3 Big Names
With Metals and Mining [M&M] commodity prices rallying ~13 percent in 2Q16, the view on Steels had become “less negative,” although the preference remains for companies with gold exposure, Deutsche Bank’s Amy Tan said in a report. She added that China's stimulus had created a financing "window," boosting balance sheets in the sector.
Balance Sheets Improve
Balance sheet activity during 2Q16 was particularly high, with around 9 percent of the M&M sector’s market cap being issued, refinanced or sold in 1H16. This suggests that “the capital markets “window” that opened in April, effectively allowing most NA M&M companies to either re-capitalize strained Balance Sheets or extend near-term debt maturities into future periods,” analyst Amy Tan mentioned.
Although the metals sector requires significant supply cuts, this could take longer given the recent rise in prices. Tan added that in the absence of the needed supply cuts, prices would likely not continue the upward trend. For steel, the US HRC estimates for 2016 and 2017 have been raised by about 13 percent to an average of $520/st and by about 11 percent to $500/st, respectively.
The analyst noted that the NYMEX forward December 2016 contract was currently trading at $538/st and there could be correction from these peak levels.
Upgrading Three Stocks
Tan mentioned that the following stocks had been upgraded because of the improved steel price outlook and balance sheet refinancing:
- Nucor Corporation (NYSE: NUE) – from Hold to Buy, with price target raised from $52 to $60.
- United States Steel Corporation (NYSE: X) from Sell to Hold, with price target raised from $8 to $15.
The analyst also upgraded the rating on Kinross Gold Corporation (USA) (NYSE: KGC) from Sell to Hold, citing valuation as the reason. The price target has been raised from $3.10 to $4.50. She added that gold exposure through Newmont Mining Corp (NYSE: NEM) was recommended. The stock is rated Buy, while the price target has been raised from $38 to $44.
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