[ferro-alloys.com] Jefferies has downgraded BHP Billiton and UBS has upgraded it. Miners greatly benefited from Chinese stimulus-driven demand in 2016

The risk/reward dynamics in the metals and mining sector have shifted, according to broker Jefferies, which has downgraded some heavyweight miners.

BHP Billiton plc (LON:BLT) has been downgraded from ‘buy’ to ‘hold’ while Vedanta Resources PLC (LON:VED) goes from ‘hold’ to ‘underperform’.

The balance sheet recapitalisation phase is over, in the broker’s view, as is the Chinese stimulus-driven recovery in demand for minerals.

Although prices for some commodities, such as copper, should go higher, the broker is less optimistic about others, as the macroeconomic cycle is no longer a clear positive.

“The miners greatly benefited from Chinese stimulus-driven demand in '16 following a near hard landing in 2H15. Most miners recapitalized their balance sheets with asset sales and FCF [free cash flow],” the mining team at Jefferies noted.

“While balance sheets are no longer a serious concern, the end to Chinese stimulus is; however, a cyclical slowdown does not imply the death of mining. Some commodities, such as copper, lithium, cobalt and vanadium, will benefit from higher electric vehicle penetration and use of batteries in general. Copper should also benefit from a stronger consumer globally.

“Supply constraints in some cases will help as well (copper & coking coal). Meanwhile the outlook for iron ore continues to be a real concern, especially for higher cost producers,” Jefferies reckons.

Contrariwise, UBS has upgraded BHP to ‘buy”, saying the cash flow is “too compelling”.

The Swiss bank still expecting the mining leviathan to reported robust earnings when it reports in August and pay out 56 cents a share in dividends, which would represent 60% of UBS’s forecast earnings per share.

The stock has underperformed perennial rival Rio Tinto for more than three years, driven by a de-rating of its oil interests, but UBS wonders whether BHP’s US onshore oil business is due a revaluation.

“We value US Onshore at US$4.5bn, but transaction multiples and peer comparisons suggest closer to US$10bn may be possible,” UBS said.

“We expect the stock to re-rate as BHP steps up returns & the volatility in commodities/mining stocks moderates,” UBS concluded.

• [Editor:Wang Linyan]