Broker snap: QE will drive mining equities, says UBS

10th Sep 2012 10:30

The outlook for the UK mining sector is now improving as expectations for quantitative easing (QE) increase, according to UBS on Monday morning.The sector had tough first half, with the average EBITDA (earnings before interest, tax, depreciation and amortisation) of UK diversified miners fall by over 20% in the six-month period to the lowest level since the second half of 2009, the broker highlighted. The reason for this was falling commodities prices (coal and iron ore especially) and cost inflation, though this was partly offset by foreign exchange movements and higher volumes.At spot commodity prices, the broker said it still sees material downside risk (over 25%) to earnings per share (EPS) at Rio Tinto, BHP Billiton and Anglo American due to the collapse in iron ore prices since June.However, following the weak US payrolls data on Friday, UBS is now expecting the Federal Reserve to announced QE3 at the Federal Open Market Committee (FOMC) meeting on Thursday.The broker said: "QE triggers a return of capital flows to emerging markets, incentivising companies to stop running for cash and embark on a commodity bullish restocking phase. As in the past, QE is likely to drive up commodity prices and in turn mining equities."UBS has upgraded its rating for Kazakhmys from 'sell' to 'buy' and reiterated its 'buy' calls on ENRC and Ferrexpo.It has also switched its preference to Rio Tinto over Anglo American and BHP. As for Glencore and Xstrata, the broker says that are well positioned but the merger will be the key driver in the near term.Mining stocks were climbing an average 1.06% in morning trade.BC