德银-欧洲-金属与采矿业-业绩展望：现金回报、成本和资金分配-20180126-38页_4mb

European Metals & Mining Industry Report Summary (26 January 2018)

Core Content

This report provides an outlook for the European metals and mining sector, focusing on cash returns, cost pressures, capital allocation, and upcoming results. It outlines key themes and recommendations for major companies in the sector.

Main Themes

1. Increased Cash Returns in 2018

   • Companies have significantly reduced net debt over the past two years, with net debt reaching ~47bn in YE17 from ~99bn in YE13.
   • This reduction is expected to lead to a significant lift in cash returns in 2018.
   • Rio Tinto (RIO) is highlighted as the highest yielding large cap in the coverage, with an expected all-in cash return yield of over 8% in FY18.

2. Cyclical Cost Pressures

   • DB's cost proxy indicates a YoY US$ based cost inflation of ~8% in 2018.
   • Major resource currencies such as AUD and ZAR are trading stronger than 2017 averages, and spot Brent is ~23% higher.
   • Companies like FXPO, KAZ, S32, ANTO, and NYH are expected to face significant cost pressures.

3. Investor Focus on Capital Allocation

   • There is an increased investor focus on the use of surplus cash flows and capital allocation.
   • M&A activity is likely to increase, but some companies may still consider divestments.

4. Earnings Upgrades

   • There is a potential for consensus earnings upgrades, with DB's spot EBITDA forecast above consensus by more than 20%.

Key Recommendations and Top Picks

• Top Picks:

  • Rio Tinto (RIO.L): Buy, with a target price of GBP3,918.50. Expected to deliver a high all-in cash return yield in FY18.
  • Glencore (GLEN.L): Buy, with a target price of GBP397.00. Expected to see a potential dividend top-up and progress on acquisitions.
  • First Quantum (FM.TO): Buy, with a target price of CAD19.00. Expected to secure project financing and see progress on Cobre Panama.

• Sells:

  • Antofagasta PLC (ANTO.L): Sell, with a target price of GBP959.20. Facing higher opex risk and valuation concerns.
  • South32 (S32.L): Sell, with a target price of GBP216.20. Exposure to raw material price inflation.
  • Boliden AB (BOL.ST): Sell, with a target price of SEK287.70. Facing smelting margin pressure, FX, and peaking zinc prices.

Key Catalysts and Events in 1H18

• Rio Tinto: Selling of marginal assets, negotiations with unions at Escondida, and developments at Grasberg.
• Glencore: Completion of acquisitions, bolt-on M&A activity, and restart of Katanga mine.
• First Quantum: Securing project financing for Cobre Panama.
• BHP: Disposal of US Onshore business, updates on Samarco legal matters, and potential buyback.
• Anglo American: Strategic outlook post ANC elections.
• South32: Possible dividend restart and updates on new project approvals.

Dividend and Buyback Assumptions

• Rio Tinto: Expected to increase its 2018 buyback from US$1.9bn to US$3bn, with a dividend yield of ~5.5% and all-in cash return yield of ~8.4%.
• BHP: Expected to maintain a high DPS payout ratio, with a target of a potential buyback in mid-year.
• Glencore: Likely to announce a higher dividend, with a forecasted FY17 dividend of >$2.5bn.
• South32: Expected to have an upgraded opex guidance and face cost pressures.
• Boliden: Expected to pay a dividend above the usual 33% payout, with a target of a 50% payout.
• Anglo American: Expected to stick to a 40% DPS payout policy.

Valuation Metrics

• Valuation Metrics Overview:
  • BHP Billiton: Buy, with a target price of GBP1,900. Expected to have an upside of 22%.
  • Glencore: Buy, with a target price of GBP450. Expected to have an upside of 13%.
  • First Quantum: Buy, with a target price of CAD23. Expected to have an upside of 21%.
  • Rio Tinto: Buy, with a target price of GBP4,600. Expected to have an upside of 17%.
  • Anglo American: Hold, with a target price of GBP1,550. Expected to have a negative upside of -11%.
  • Ferrexpo: Hold, with a target price of GBP290. Expected to have a negative upside of -2%.
  • Norsk Hydro: Hold, with a target price of NOK58. Expected to have a 0% upside.
  • Kaz Minerals: Hold, with a target price of GBP950. Expected to have a 7% upside.
  • Antofagasta: Sell, with a target price of GBP900. Expected to have a negative upside of -6%.
  • Boliden: Sell, with a target price of SEK260. Expected to have a negative upside of -10%.

Capital Expenditure and Production Guidance

• Capex Guidance for FY17:
  • Rio Tinto: US$5.5bn.
  • Production Guidance for FY17:
    • Iron ore: 330-340mt.
    • Copper mined: 510-610kt.
    • Copper refined: 225-265kt.
    • Aluminium: Not specified.

Risks

• Key risks include:
  • Zinc prices.
  • Copper prices.
  • TC prices.
  • Macroeconomic factors.
  • FX fluctuations.

Summary of Key Financial Metrics

• Net Debt to EBITDA: Most companies have reduced this ratio, with Rio Tinto at ~0.1x in 2018.
• Net Debt to Equity: Also reduced for most companies, with Rio Tinto at ~3.6x in 2018.
• FCF Yield: Expected to increase for many companies, with Rio Tinto at ~4.6% in 2018.
• Dividend Yield: Expected to increase for many companies, with Rio Tinto at ~5.5% in 2018.

Conclusion

The European metals and mining sector is expected to see significant improvements in cash returns due to reduced net debt and strong free cash flows. Companies like Rio Tinto and Glencore are highlighted as top picks, while South32 and Antofagasta are recommended for sale. The report emphasizes the importance of tracking cost pressures, FX fluctuations, and capital allocation strategies.