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Mining
After the thrill is gone
The coming year will remind some of the old days as many mining divisions
approach break-even. We think the upcoming earnings season for miners could
reveal charges and writedowns of US$10bn-15bn in total. Despite a ’lacking’
macro outlook and continued volatility, we still like select miners in 2009.
Key recommendations & forecasts
Reuters Year end Recom Price Target
price
EPS
1fcst
PE
1fcst
Anglo American AAL.L Dec 2008 Hold £13.15 £12.50 5.14 3.52
Antofagasta ANTO.L Dec 2008 Hold £4.17 £4.30 0.86 6.79
BHP Billiton Plc BLT.L Jun 2009 Buy £11.53 £13.00 2.39 6.62
ENRC ENRC.L Dec 2008 Buy £3.15 £5.00 2.01 2.16
Rio Tinto Plc RIO.L Dec 2008 Hold £15.10 £14.00 8.15 2.50
Vedanta VED.L Mar 2009 Buy £6.04 £8.50 1.40 5.91
Xstrata XTA.L Dec 2008 Buy £7.38 £11.00 4.29 2.36
Source: Company data, ABN AMRO forecasts
Priced at close of business 21 January 2009
Hesitant about the upcoming ‘lack of’ earnings season
The upcoming results season will likely be the worst of 2008 and 2009 in terms of underlying
cash flow due to an estimated US$10-15bn one-offs on provisional pricing, inventory and
goodwill write-downs, as well as other asset write-downs. BHP has led the way by
announcing an additional US$2.8bn of write-downs including Ravensthorpe. We think Xstrata
will likely reconsider its valuation of Falcondo, as will Rio of its Alcan-related asset values.
Reducing 2008-10 EPS forecasts by 45%, on average
Looking beyond the earnings season, we have adjusted our forecasts for all miners for our
new commodity price profile, production cutbacks, the one-off charges listed above and
marked-to-market pricing. Our average mining EPS forecast for FY09 has been reduced by
70%, representing a 50% yoy drop from FY08 EPS. Our FY08-10 EPS forecasts are 8%,
31% and 5% below current Bloomberg consensus, respectively.
We think leveraged names have gained relative attraction
In the last quarter of 2008, risk-averse investors focused on the likes of BHP Billiton and
Antofagasta in mining. However, just two weeks into 2009, there already seems to be some
appetite for the 4Q08 underperformers. We still think that 2009 core holdings should be
centred around strong balance sheets for 2009, but we also think the leveraged names like
Xstrata and Vedanta could surprise on the upside.
Our top picks for the year are BHP Billiton, Xstrata and Vedanta
BHP Billiton remains a top pick going into 2009, as its balance sheet and diversification stand
it in good stead to pick up assets on the cheap in this downturn. Xstrata and Vedanta are
higher risk names than BHP, but we think they could perform well if stocks move toward midcycle
valuations by 1H09 as we expect. We remain very cautious on any sort of demand
recovery in 2009, and expect a lackluster performance in mining shares in 2H09.
Contents
Leveraged miners look interesting 3
We see several reasons not to like the miners, chief of which is nobody seems to
know where the bottom of the cycle is, or exactly what bottom-of-the-cycle earnings
are. Things do not look pretty for the miners for the coming 12 months, but we like
select names now.
Cutting base and bulk profiles 4
We cut back our pricing forecasts on base metals and bulk for the coming three
years. Precious metals remain our favoured pick for the coming year, followed by
industrial metals in 2010/11.
Looking for signs of life 5
The outlook for the mining sector in 2009 remains unclear. Without a significant
pick-up in demand, we believe the one period of positive absolute performance for
equities this year could come in 1H09 as expectations come off the bottom.
Has the switch from safety to risk already started? 5
Getting closer to trough earnings numbers 8
Liquidity constraints should limit growth for most 11
Keep select exposure to miners 16
Despite all the downgrades seen in the sector in recent weeks, with many of the
ratings heading towards Hold and Sell territory, we think that at these levels
investors should keep their exposure in the sector. We believe the leveraged names
are now relatively interesting.
Company profiles 18
Anglo American 18
Antofagasta 30
BHP Billiton Plc 37
ENRC 47
Vedanta Resources 56
Xstrata 67
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