Another good year expected
BHP Billiton and Glencore are looking relatively more attractive than other diversified miners, Macquarie says
BHP Billiton and Glencore are being upgraded by some analysts on expectations that both these diversified miners will benefit this year from balanced global growth and the shares’ discount to their peers.
Barclays Capital has raised its target price for Billiton to £16.50 and Glencore to £4.50.
Macquarie says it prefers BHP Billiton and Glencore over South32 or Anglo American, in an early January report written when Billiton was at £15.62 (about R260) and Glencore at £3.91 (about R65). Since then Billiton’s shares have lifted to £16.20 and Glencore’s to £4.08. Macquarie’s targets are £17.10 for Billiton and £4.18 for Glencore.
Billiton’s shares more than halved between November 2015 and January 2016 after two waste-water dams at the jointly owned Samarco iron-ore mine in Brazil burst, killing 19 people and causing widespread damage. Though a settlement of tens of billions of dollars of claims is still under discussion, the share price has recovered on better sentiment towards miners as prices of bulk minerals have soared.
Glencore’s shares were also sold off during 2015 on negative sentiment towards its debt exposure and decision to defer a dividend, but it has more than trebled since September 2015’s low point.
Macquarie says there are several reasons why 2018 should be the third year of outperformance for diversified mining companies. Capex spending is still muted, which means free cash flows are attractive and supply remains constrained. Though Macquarie expects Chinese growth to slow to 6.4% this year from 6.8% last year, the outlook for global growth excluding China is more attractive than it was during the 2009-2011 boom.
There is a recovery in consumer spending and business investment in all major economies while central bank policies outside the US remain accommodative, with limited prospects of interest-rate hikes in Europe or Japan.
Edison analyst Alastair George disagrees. If Europe’s economic indicators continue to be strong in the first quarter of this year the European Central Bank may start to guide towards a more hawkish monetary policy, he says. This was already being anticipated in a strengthening euro/dollar rate.
Another Edison analyst, Charles Gibson, says base metals, particularly those used in batteries, are likely to continue outperforming precious metals this year, and exploration companies will outperform majors. But when the macroenvironment changes, investors should be able to switch rapidly.
Glencore