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Jefferies upgrades Anglo American as it highlights strong fundamentals
Jefferies upgraded Anglo American to 'buy' from 'hold' and lifted the price target to 2,000p from 1,500p, pointing to strong mining sector fundamentals.
The bank said fundamentals are solid due to serious supply constraints at existing mines, a lack of supply growth from new projects, stable Chinese demand and improving demand from the rest of the world.
"Anglo's balance sheet is no longer a concern, its free cash flow yield should average more than 14% a year over the next three years, and it has potential positive catalysts in 2018," it said.
In addition, it argued that Anglo is well placed to benefit from an extended period of high prices for copper, coal and iron ore.
"Anglo is a candidate for corporate restructuring (such as a breakup or as an acquisition target) now that it has a new Chairman and a potential activist investor in Vedanta's Anil Agarwal, who owns 20% of Anglo shares.
"Even if there are no major corporate changes at Anglo, a sizeable share repurchase is likely this year. While we are not bullish on the outlook for platinum group metals or diamonds, we can no longer justify not having a buy rating on Anglo shares as the AAL valuation is compelling even after the strong performance over the past two years, and positive catalysts may be imminent."
At 1455 GMT the shares were down 0.1% to 1,603p.