Glencore Xstrata hit by JPMorgan downgrade to 'neutral'

21st Feb 2014 09:23

Mining group and commodities trader Glencore Xstrata was trading in the red on Friday morning after JPMorgan Cazenove cut its rating on the stock from 'overweight' to 'neutral', saying that its peers have overtaken it in terms of capital returns potential.JPMorgan has left its 350p target price unchanged, with the stock now trading within just 3% of this target."We calculate GLEN has lost its status as the highest free cash flow (FCF) yielding diversified miner, with a cumulative 2014-16E FCF yield of 18%," the US bank said in a report on Friday."Strong results and updated capital allocation guidance from RIO and BHP in the last week lead us to conclude they are poised to return capital in 2014/15, six to 12 months earlier than GLEN, with lower event risk."JPMorgan said that given that Glencore Xstrata shares comparable FCF yields and earnings growth as mining peers Rio Tinto and BHP Billiton, its valuation premium to the two companies on a price-to-earnings basis - at 72% and 34%, respectively - is no longer justified.Ahead of Glencore Xstrata's 2013 results due out on March 4th, the bank has pencilled in $3.9bn in underlying earnings, equal to 29.5 cents per share, which represents a 30% decline on the previous year.As for the current quarter, JPMorgan said that upcoming sale of the Las Bambas copper project in Peru presents downside risk for the shares if a deal - proceeds speculated at around $4.5bn - is not concluded before the results announcement."We regard GLEN's ability to initiate capital returns is contingent on receipt of Las Bambas cash, which we expect in 2015."The stock was down 1.3% at 336.05p by 09:53 on Friday.BC