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Metals & Mining

Results book – 2H18

This report contains a reporting schedule and results previews for the metals & mining companies under our coverage with a reporting period of December 2018.

Our neutral view on the miners

We believe the capital cycle favours rising medium-term returns for diversified miners as companies are not investing enough to maintain production over the medium-to- longer term. Management teams continue to focus on value-creation, rather than volume growth, which has been value-destructive historically. Efficiency and productivity enhancements and a recovery in commodity prices have resulted in strong cash-flow generation. Most balance sheets are now comfortable, in our view, and we forecast attractive dividends. However, we are cautious about a potential near-term economic slowdown and the negative impact it may have on commodity demand.

Expected key reporting trends in 2H18

We believe ‘value over volume’ will continue to be a key theme this reporting season. We forecast 8% YoY earnings growth for the sector in 2H18, despite volumes remaining flat, helped by weaker producer currencies and efficiency gains. We forecast a 17% decline in net debt due to strong FCF generation. We believe cash returns to shareholders may continue to improve due to comfortable balance sheets and strong cash generation; we forecast a 50% increase in dividends YoY. However, we forecast a 32% increase in capex from last year’s depressed base, to bring capex closer to the levels required to maintain production over the long term.

Minor earnings revisions

Figures 4 and 5 summarise changes to our earnings forecasts as we incorporate recently reported financial and production results and guidance changes. Our TPs and ratings are unchanged.

Key risks to our investment stance

Key risks to our investment stance include: 1) weaker-than-forecast commodity prices; 2) stronger-than-forecast producer currencies; 3) resumption of valuedestructive growth capex; 4) adverse regulatory changes in countries where the miners operate, which could erode FCF; and 5) sanctions. Conversely, if any of these key factors are more positive than we forecast, there could be upside risk to our earnings forecasts and valuations.

Sector update

Equity Research 6 February 2019

Metals & Mining Global

Johann Pretorius +27 (11) 750 1450

JPretorius2@rencap.com

Steven Friedman +27 (11) 750 1481

SFriedman@rencap.com

Kabelo Moshesha +27 (11) 750 1472

KMoshesha@rencap.com

Siphelele Mhlongo +27 (11) 750 1420

SMhlongo@rencap.com

Derick Deale

+27 (11) 750 1458 DDeale@rencap.com

Summary sector ratings and TPs (ranked by total potential 12M return, including estimated dividends)

Company

TP

Current

Rating

price*

 

 

 

Rusal, HKD

6.0

3.3

BUY

Evraz, GBp

640.0

507.6

BUY

PhosAgro, $

16.0

13.5

BUY

Norilsk, $

24.0

20.8

BUY

NLMK, $

27.0

24.0

BUY

MMK, $

10.1

8.6

BUY

Alrosa, RUB

109.0

99.5

BUY

Polyus, RUB

6,300.0

5,521.5

BUY

Rio Tinto, GBP

48.0

42.3

BUY

Exxaro, ZAR

170.0

156.5

BUY

ARM, ZAR

160.0

147.3

BUY

Impala, ZAR

45.0

38.8

BUY

AMSA, ZAR

4.0

3.5

HOLD

South32, ZAR

37.0

33.9

HOLD

BHP, ZAR

315.0

297.3

HOLD

Fortescue, AUD

6.0

5.8

BUY

Glencore, ZAR

55.0

53.1

HOLD

Vale, $

13.6

12.6

HOLD

Polymetal, GBP

8.6

8.6

HOLD

Acron, RUB

4,600.0

4,670.0

HOLD

Anglo, ZAR

340.0

345.2

HOLD

Assore, ZAR

320.0

346.8

HOLD

Sibanye, ZAR

11.1

12.1

HOLD

Kumba, ZAR

270.0

340.6

SELL

RBPlats, ZAR

25.0

28.8

SELL

Amplats, ZAR

540.0

636.0

HOLD

Gold Fields, ZAR

43.0

53.8

SELL

Northam, ZAR

40.0

48.5

SELL

Harmony, ZAR

21.0

26.9

SELL

Lonmin, ZAR

7.0

9.6

SELL

AngloGold, ZAR

110.0

190.0

SELL

Note: Priced at market close on 1 February 2019.

Source: Thomson Reuters Datastream, Renaissance Capital estimates

Important disclosures are found at the Disclosures Appendix. Communicated by Renaissance Securities (Cyprus) Limited, regulated by the Cyprus Securities & Exchange Commission, which together with non-US affiliates operates outside of the USA under the brand name of Renaissance Capital.

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Contents

Investment summary

3

Reporting schedule

6

Earnings revisions

7

Reporting trends: 2H18E vs 2H17

8

Reporting trends 2H18E vs 1H18

10

Results previews

11

Commodity price and exchange rate forecasts

42

Peer comp charts

43

African Rainbow Minerals

44

Alrosa

45

Anglo American

46

Assore

47

BHP

48

Exxaro

49

Fortescue

50

Glencore

51

Kumba Iron ore

52

NorNickel

53

Rio Tinto

54

Rusal

55

South32

56

Vale

57

AngloGold

58

Gold Fields

59

Harmony

60

Polymetal

61

Polyus

62

Sibanye

63

Anglo American Platinum

64

Impala

65

Lonmin

66

Northam

67

Royal Bafokeng Platinum

68

Acron

69

PhosAgro

70

ArcelorMittal SA

71

Evraz

72

MMK

73

NLMK

74

Disclosures appendix

75

Renaissance Capital

6 February 2019

Metals & Mining

2