Broker snap: Fresnillo, Randgold and Petropavlovsk hit by downgrades from Citi

15th Feb 2013 09:15

Citi Research has downgraded its ratings for mining peers Fresnillo, Randgold and Petropavlovsk as part of its review into the precious metals sector."We have for some time been expressing caution both about the future trend of precious metals prices and about the premium valuations on gold and silver stocks, but have been unwilling to downgrade them to 'sell' ratings prior to further evidence of a loss of momentum in gold and silver prices," the broker said on Friday morning."We now believe that we are seeing that loss of momentum and do not believe that the 'hothouse' valuation effect of UK buyers chasing limited top-quality UK gold and silver stocks will prevail for much longer."Citi explained that price-to-net present value (P/NPV) ratios, which compare the current stock price to the future profitability of investments, tend to follow metals prices: "When prices fall, there is the double-whammy of the market no longer being willing to attach premium valuation ratings."As such, it has reduced its P/NPV for Fresnillo from 2.0x to 1.6x, saying that while the higher valuation was tolerated in the silver bull market, it no longer feels appropriate. The stock has been downgraded from 'neutral' to 'sell'."We see no reason why Fresnillo should trade on a 23x consensus [earnings] for 2013 when the consensus for diversified miners is 10.4x, unless there is a further silver bull market ahead of us."Randgold, which Citi also downgraded from 'neutral' to 'sell', has had its P/NPV rating cut from 1.6x to 1.4x to highlight the risks associated with political instability in Africa. Nevertheless, it is still rated higher than other gold stocks due to the quality of its assets, Citi said.As for Petropavlovsk, its rating has been cut from 'buy' to 'neutral' for a stock-specific reason: "Peer group Polymetal recently announced that it was having troubles with its POX technology, the same technology that POG will be using in future. As a precaution, we have downgraded our assumptions on the effectiveness of the technology in our model and this has led to a lower NPV," the broker said.BC