From CLSA today:
2QTR update – BUY the dip in quality names – RIO, BHP, AWC and OZL.…..
Having upgraded our base metals (ex-nickel) forecasts by an average of 11% in 17CL and 7% in 18CL and our iron ore and thermal coal price assumptions by 25/18% and 10/7% in 17/18CL, the team revisit the earnings outlook for the Australian mining sector. Changes are detailed in the table below but Kaan and DK have upgraded their CY17 earnings by an average 11% and have increased price targets by 5%. We are mindful of the argument that mining equities are considered a beta play on the underlying commodity, and see commodity price normalisation as a risk. However, TSR is more than a function of commodity price movements. With higher FCF yields, capital management upside, operational catalysts, production growth, productivity and cost out benefits, we believe select equities will outperform underlying commodities. We advocate “buying the dips” in quality names.
Stocks under coverage now have an average FCF yield of 9% for CY17. The largest price-target upgrades have been to FMG (+33%), S32 (+16%) and SFR (+8%). We have made five recommendation changes (all upgrades) – upgraded RIO to BUY (from O-PF) upgrade BHP to BUY (from O-PF), upgrade AWC to BUY (from O-PF), upgrade FMG to O-PF (from SELL),upgrade S32 to U-PF (from SELL) butour top picks remain RIO, BHP, AWC and OZL and of the majors, Kaan notes that RIO continues to have the strongest balance sheet, compelling FCF (and as such the best prospects for capital management) and a superior production growth profile to BHP, allowing it to deliver longer term value creation. OZL remains our top copper pick on valuation rerate upside and is cheap relative to global peers (-10% P/NPV discount at 1.1x). AWC continues to generate significant FCF (9% yield), which should be passed through as a dividend (8% yield). Net debt is low, and the company is pursuing low-capex creep and expansion projects. BHP, is generating strong FCF with increased exposure to our preferred commodities over the short term. The balance sheet is in a good state and it is deleveraging at a significant pace.
Poor bastards.
