- •Contents
- •Revisions to our forecasts, TPs and ratings
- •Investment stance
- •Capital cycle favours rising returns
- •Comfortable balance sheets and supportive dividend potential
- •Value relative to other stocks
- •Yield potential through the cycle
- •Mid-cycle cash generation offers supportive yields
- •Where to hide if you are bearish
- •What to buy if you are bullish
- •Limited lives weighing down IRR
- •Yields should compensate for limited lives
- •Positive earnings momentum continues to support share prices
- •Commodity price revisions
- •Commodity section
- •Commodity section
- •Preference for base metals over steelmaking materials
- •Earnings revisions
- •Risks and catalysts
- •Peer comp charts
- •Commodity price and exchange rate forecasts
- •Important publications
- •African Rainbow Minerals
- •Alrosa
- •Anglo American
- •Assore
- •Exxaro
- •Glencore
- •Kumba Iron ore
- •NorNickel
- •Rio Tinto
- •Rusal
- •Vale
- •Gold Fields
- •Harmony
- •Polymetal
- •Anglo American Platinum
- •Lonmin
- •Northam
- •Royal Bafokeng Platinum
- •Sasol
- •Disclosures appendix
vk.com/id446425943
Metals & Mining – yield potential through the cycle
Cheap valuations - real or illusion?
vk.com/id446425943
Metals & Mining
Cheap valuations – real or illusion?
Earnings momentum remains positive and most mining companies still seem cheap to us based on spot valuation multiples. However, we believe margins have reached elevated levels in some cases, which may not be sustained over the long term. We believe production disruptions and supply discipline may support high margins over the medium term, but call for margins declining slightly over the longer term. We still see value in the mining sector and prefer companies that offer attractive FCF yields based on sustainable mid-cycle margins. Our top picks are Rusal, Norilsk Nickel, Alrosa and African Rainbow Minerals (ARM; which we upgrade to BUY).
Underinvestment supports high returns over the medium term
We believe sector capex has been cut to a level that could result in supply deficits over the medium term. Capex/depreciation, which averaged around 2.0x over the past 16 years, is still only at around 1.3x, which is not enough to replace depleting mines, in our view. We therefore forecast mine production to decline over the next 10 years. This could underpin rising commodity prices and sector returns over the medium term. Supply disruptions and increasing regulation and scrutiny with regard to permitting are adding to supply constraints.
Positive earnings momentum; upgrade ARM to BUY
We increase our earnings forecasts and TPs for most companies under our coverage as we incorporate higher commodity prices (for iron ore, copper and nickel in particular). Changes to our TPs are summarised in the table on the right. We upgrade our rating on ARM from Hold to BUY as its medium-term cash flows benefit from an improved iron ore outlook. Earnings momentum for the sector remains positive and we calculate 24% upside to consensus one-year forward earnings if spot commodity prices prevail.
Attractive spot FCF, but margins approaching optimistic levels
Mining companies’ valuation multiples seem cheap to us based on earnings and FCF calculated using spot commodity prices. However, many commodity prices are no longer supported by costs and in some cases incentivise new supply. We therefore forecast declining margins over the longer term. Market expectations about ‘normalised’ margins have increased substantially since the beginning of 2016. Our long-term margin forecasts have increased more than 70% since 2016 and are now approaching the average margin achieved over the past 16 years, which included the commodity super-cycle. Key downside risks to spot margins are: 1) investment in new supply as high prices remove capital barriers; 2) a slowing global economy; 3) increasing demands from other mining stakeholders, which is typical during a high-commodity-price environment (governments, labour, suppliers to the mining industry etc).
Sector update
Equity Research 1 April 2019
Metals & Mining Global
Johann Pretorius +27 (11) 750 1450
JPretorius2@rencap.com
Steven Friedman +27 (11) 750 1481
SFriedman@rencap.com
Kabelo Moshesha +27 (11) 750 1472
KMoshesha@rencap.com
Siphelele Mhlongo +27 (11) 750 1420
SMhlongo@rencap.com
Derick Deale
+27 (11) 750 1458 DDeale@rencap.com
Summary sector ratings and TPs (ranked by total potential 12M return, including estimated dividends)
Company |
TP |
Previous Current |
Rating |
||
TP |
price* |
||||
|
|
|
|||
Rusal , HKD |
6.6 |
6.0 |
3.5 |
BUY |
|
Norilsk, $ |
31 |
27 |
22 |
BUY |
|
Alrosa, RUB |
109 |
109 |
94 |
BUY |
|
Impala, ZAR |
83 |
79 |
65 |
BUY |
|
Polyus, RUB |
6,600 |
6,500 |
5,434 |
BUY |
|
Exxaro, ZAR |
190 |
170 |
164 |
BUY |
|
Rio Tinto, GBP |
50 |
48 |
43 |
BUY |
|
ARM, ZAR |
190 |
170 |
166 |
BUY** |
|
Fortescue, AUD |
7.1 |
6.0 |
6.6 |
BUY |
|
Merafe, ZAR |
1.5 |
1.4 |
1.4 |
BUY |
|
Vale, $ |
15.5 |
13.6 |
13.0 |
HOLD |
|
Sasol, ZAR |
510 |
480 |
445 |
BUY |
|
Glencore, ZAR |
65 |
55 |
59 |
HOLD |
|
Sibanye, ZAR |
19.5 |
17.6 |
17.4 |
BUY |
|
Anglo, ZAR |
400 |
350 |
378 |
HOLD |
|
South32, ZAR |
40 |
37 |
38 |
HOLD |
|
Lonmin, ZAR |
17 |
13 |
15 |
HOLD |
|
BHP, ZAR |
340 |
315 |
340 |
HOLD |
|
Assore, ZAR |
350 |
320 |
361 |
HOLD |
|
RBPlats, ZAR |
37 |
31 |
35 |
HOLD |
|
Polymetal, GBP |
8.4 |
8.6 |
8.7 |
HOLD |
|
Amplats, ZAR |
780 |
710 |
795 |
HOLD |
|
Kumba, ZAR |
330 |
280 |
405 |
SELL |
|
Northam, ZAR |
60 |
52 |
67 |
SELL |
|
Gold Fields, ZAR |
46 |
42 |
58 |
SELL |
|
Harmony, ZAR |
22 |
19 |
30 |
SELL |
|
AngloGold, ZAR |
115 |
110 |
205 |
SELL |
*Priced at market close on 26 March 2019. **Previously Hold.
Source: Thomson Reuters Datastream, Renaissance Capital estimates
Important disclosures are found at the Disclosures Appendix. Communicated by Renaissance Securities (Cyprus) Limited, regulated by the Cyprus Securities & Exchange Commission, which together with non-US affiliates operates outside of the USA under the brand name of Renaissance Capital.
vk.com/id446425943
Contents
Revisions to our forecasts, TPs and ratings |
3 |
Investment stance |
4 |
Capital cycle favours rising returns |
10 |
Comfortable balance sheets and supportive dividend potential 12
Value relative to other stocks |
14 |
Yield potential through the cycle |
16 |
Mid-cycle cash generation offers supportive yields |
22 |
Where to hide if you are bearish |
23 |
What to buy if you are bullish |
24 |
Limited lives weighing down IRR |
25 |
Yields should compensate for limited lives |
26 |
Positive earnings momentum continues to support share |
|
prices |
27 |
Commodity price revisions |
32 |
Commodity section |
33 |
Preference for base metals over steelmaking materials |
34 |
Earnings revisions |
55 |
Risks and catalysts |
58 |
Peer comp charts |
60 |
Commodity price and exchange rate forecasts |
61 |
Important publications |
63 |
African Rainbow Minerals |
64 |
Alrosa |
65 |
Anglo American |
66 |
Assore |
67 |
BHP |
68 |
Exxaro |
69 |
Fortescue |
70 |
Glencore |
71 |
Kumba Iron ore |
72 |
NorNickel |
73 |
Rio Tinto |
74 |
Rusal |
75 |
South32 |
76 |
Vale |
77 |
AngloGold |
78 |
Gold Fields |
79 |
Harmony |
80 |
Polymetal |
81 |
Polyus |
82 |
Sibanye |
83 |
Anglo American Platinum |
84 |
Impala |
85 |
Lonmin |
86 |
Northam |
87 |
Royal Bafokeng Platinum |
88 |
Sasol |
89 |
Merafe |
90 |
Disclosures appendix |
91 |
Renaissance Capital
1 April 2019
Metals & Mining
2