Potential for cost deflation puts miners on the radar at Nomura

28th Jan 2014 13:11

Three years of underperformance changed the typical thinking of management at metal and mining outfits and the consensus may not yet have woken up to the implications of that for valuations in the sector, Nomura said in a research note issued on Tuesday. In 'boom times' "Growth at all costs" was the mantra of management, but that was replaced by an emphasis on "Capital management".The result was that free-cash-flow yields were moving sharply higher and in turn consensus earnings estimates were beginning to adjust upwards. Earnings per share (EPS) at miners were now expected to expand by approximately 24% in 2014, versus 14% for the wider market. Furthermore, other factors, such as the depreciation of commodity currencies, held the potential to see the structural cost-inflation built-up during the so-called '[commodity] super-cycle' unwind. Yet according to the broker it was best for investors to be cognisant of the risks inherent to investing in the sector too; for example, a 'hard-landing' in China. Nomura's Chinese economists attached a 30% probability to such a scenario. Should it come to pass that would halve profit estimates for companies within the sector. As a result of all of the above Nomura hiked its price targets for the companies in the sector, and notwithstanding that risk: BHP Billiton (to 2,400p from 2,220p), Rio Tinto (to 85 AUD from 80AUD), Glencore (to 330p from 290p). Its preferred stock was BHP, followed by Rio Tinto (analysts' estimates for cost savings at Rio Tinto are further along than at BHP), while it was still too early for Glencore and Anglo American. AB