德银-欧洲-金属和采矿行业-预估提升：铜从2018年开始赤字，但可以逢低买入-20171013-Deutsche_Bank-European_Metals_＆_MiningRaising_estimates,Copper_deficits_from_2018,buy_the_dips_in_iron_ore_24页-2mb

Summary of Industry European Metals & Mining Report (13 October 2017)

Core Content

This report provides an analysis of the European Metals & Mining sector, focusing on commodity price forecasts, EBITDA estimates, and stock recommendations. It outlines the current market outlook, valuation metrics, and investment strategies for key companies in the sector.

Main Viewpoints

• Commodity Price Raising: The report raises estimates for several key commodities, including copper, zinc, nickel, and coking coal, due to anticipated market deficits and improved price outlook.
• Copper Deficit Outlook: Copper is expected to be in sustained deficit starting from 2018, with prices rising to $297c/lb. The deficit is projected to increase to 295 kt in 2018 compared to 255 kt previously.
• Iron Ore Strategy: A "buy the dips" strategy is recommended for iron ore, anticipating a rebound in Spring 2018. Prices are forecasted to rise from US$55/t in 4Q17 to US$70/t by mid-2018.
• Valuation and Investment Recommendations: The report highlights investment opportunities and risks, recommending "Buy" for Rio Tinto, Glencore, and First Quantum, and "Sell" for Anglo American, Antofagasta, and Kaz Minerals. Boliden and Ferrexpo are recommended to "Hold".
• Mid-Cycle Valuation Potential: The report suggests that mid-term re-rating potential exists for the majors due to capital and supply discipline, with a focus on cash flow over growth. It estimates an upside of ~20% to mid-cycle valuations.
• FCF Yield and Dividend Potential: Mid-cycle FCF yields of 8-11% are expected, which could translate into a ~5% dividend yield, making the sector attractive for income-focused investors.
• Risk Factors: The main risks identified include variance in commodity prices and sovereign risks, which could impact the valuations and recommendations.

Key Information

Commodity Price Forecasts

• Copper: Expected to rise from $257c/lb to $297c/lb in 2018, with a sustained deficit from 2018.
• Iron Ore: Spot prices are forecasted to rise from US$55/t in 4Q17 to US$70/t by mid-2018, with a rebound in Spring 2018.
• Aluminium: Prices are expected to increase, with a cash price forecast of $90c/lb and $94c/lb for 2017 and 2018, respectively.
• Nickel: Prices are projected to rise to $522c/lb in 2018 and $592c/lb in 2019.
• Zinc: Prices are forecasted to increase to $127c/lb in 2018 and $113c/lb in 2019.
• Precious Metals: Gold and silver prices are expected to remain relatively stable, while platinum and palladium show some upward movement.

EBITDA and EPS Impact

• The report forecasts a 5-10% increase in EBITDA for 2017-2018 across the sector.
• For major companies, the EBITDA increase is as follows:
  • Rio Tinto (RIO.L): 3% to $17.5bn in 2017, 7% to $17bn in 2018.
  • Glencore (GLEN.L): 4% to $15bn in 2017, 5% to $15.3bn in 2018.
  • First Quantum (FM.TO): 29% increase in 2018 EBITDA to $7.9bn.
  • BHP Billiton (BHP.L): 8% increase in 2017 EBITDA to $21bn, 15% increase in 2018 EBITDA to $22.1bn.
  • Kaz Minerals (KAZ.L): EBITDA increases by 14%, 29%, and 10% for 2017, 2018, and 2019, respectively.

Stock Recommendations

• Buy: Rio Tinto (RIO.L), Glencore (GLEN.L), First Quantum (FM.TO).
• Hold: Boliden Ab (BOL.ST), Ferrexpo (FXPO.L), Norsk Hydro Asa (NOK), South32 (GBP).
• Sell: Anglo American (AAL.L), Antofagasta Plc (ANTO), Kaz Minerals (KAZ.L).

Target Prices and Ratings

Investment Cases

• Rio Tinto: Strong cash return story, diversified commodity exposure, and partial hedge against iron ore demand reductions.
• Glencore: Broad exposure to growth-oriented commodities, cost reductions, and latent capacity growth in copper and zinc.
• First Quantum: Strong copper exposure and growth potential from Cobre Panama, with a revised target price.
• BHP Billiton: Potential for medium-term re-rating due to improved returns and strategic asset divestiture.
• Anglo American: High exposure to bulk commodities and higher cost structure make it vulnerable to price and demand fluctuations.
• Antofagasta: Expensive relative to peers, with limited positive catalysts.
• Kaz Minerals: Positive catalysts largely played out, with a sell rating.
• Boliden Ab: Vulnerable to currency fluctuations, with a hold rating.
• Ferrexpo: Hold rating due to premium valuation and country risk exposure.
• Norsk Hydro Asa: Hold rating with revised EPS estimates and higher unit opex expectations.

Key Risks

• Variance in commodity prices.
• Sovereign risks in various countries.
• Currency fluctuations, especially for companies operating in Sweden and Europe.
• Lower demand and prices for bulk commodities in Q417 and 2018.

Conclusion

The report suggests that the European Metals & Mining sector is poised for improvement, with a focus on cash flow quality and commodity exposure. Investors are advised to consider buying opportunities in iron ore during price dips and to focus on companies with strong fundamentals and growth potential, particularly in copper and other industrial metals. The report also highlights the importance of managing currency and sovereign risks, as well as the potential for mid-term re-rating based on improved capital discipline and cash flow performance.