Broker snap: Credit Suisse sees downside risk to metals prices

3rd Apr 2013 09:21

Credit Suisse made across-the-board target-price cuts in the mining sector on Wednesday, highlighting the impact of supply overhang on metals prices this year.In a research note, the broker said that softer-than-expected demand for commodities has brought the attention back to supply growth, particularly for iron ore and copper, which combined will account for an estimated 60% of earnings over the sector in 2013."Despite more restrained spending, 2013/14 will be a period of price discovery, as markets move into surplus and the sector lives through the over-spend of prior years. We see downside risk to prices in H213 and this remains a challenging investment backdrop in the short run."Credit Suisse said that these weaker prices have been expected by investors as of late with mining stocks underperforming underlying commodities and the wider market by around 10% and 15% in the year to date, respectively.Nevertheless, with the broker's earnings estimates now approaching the "mid-cycle" - large miners are now trading close to their 10-year average discount to the market - it reckons that its bearish outlook for commodities is "almost in the price".Credit Suisse thinks that companies delivering growth, reducing spend and net debt, whilst having the ability to raise dividends, are best placed to outperform."Rio Tinto remains our preferred large cap with a clear path to delivering volumes and improving cash flows. Companies that are increasing year-on-year capex/net debt in 2013 and where we are substantially below consensus include Anglo American, Kazakhmys and Antofagasta (all 'underperform' or 'neutral' rated)."The broker has made the following changes to its target prices for the following large-cap producers:Anglo American ('neutral'): target cut from 2,100p to 1,900p.Antofagasta ('underperform'): target cut from 1,150p to 1,000p.BHP Billiton ('neutral'): target cut from 2,400p to 2,250p.ENRC ('outperform'): target cut from 400p to 380p.Kazakhmys ('underperform'): target cut from 600p to 450p.Rio Tinto ('outperform'): target cut from 4,000p to 3,800p.Vedanta Resources ('outperform'): target cut from 1,500p to 1,300p.BC