UBS upgrades Glencore to 'buy', downgrades Rio Tinto to 'neutral'

23rd Feb 2015 10:09

UBS has lifted its rating for Glencore from 'neutral' to 'buy', saying the commodities trader and mining group is well positioned for a cyclical recovery.However, sector peer Rio Tinto has been hit by a downgrade from 'buy' to 'neutral' on the back of a "challenging" price outlook and lack of near-term catalysts.As for Glencore, UBS said the stock has underperformed other diversified miners by 11% over the past three months due to weaker copper prices and worries about its relatively higher operational and financial leverage.However, the bank's commodity strategist recently took a more positive view of the industrial mining sector due to the potential improvement in commodity demand in China from continued housing stimulus and improving credit availability, as well as expectations that the Federal Reserve will turn more dovish."We believe Glencore is well positioned to outperform due to its commodity mix and higher leverage (which becomes a positive), with its dividend yield comparable to peers," UBS said.The bank highlighted the company's exposure to zinc, copper and nickel, commodities which are "structurally much better" than the 'bulk' resources.Meanwhile, Glencore's annual results due 3 March should reassure the market's concerns about its balance sheet.At the same time, UBS took a more cautious view on Rio Tinto, saying that the risk-reward balance is "now more balanced" after a 23% surge in the share from the trough in mid-December.The stock has outperformed the iron ore price in that time by 32% and Glencore by 22%."While we expect the share to be underpinned by the $2bn buy-back and the robust 4.4% dividend yield, we believe higher commodity prices are needed for further meaningful outperformance, especially as Rio Tinto lacks clear company-specific catalysts and as the self-help/ cash return potential is now well understood by the market."Glencore was trading 1% lower on Monday morning, while Rio Tinto fell 1.2%.