Interactive Investor

Mining sector bid targets and share tips

20th January 2022 12:52

Graeme Evans from interactive investor

There’s plenty going on in the mining space at the moment, and one City expert has drawn up a list of stocks that could attract a takeover approach. They name their favourite stocks too.

Glencore (LSE:GLEN) and four other London-listed stocks are on a list of potential bid targets as a mining sector short on upside catalysts turns its attention to M&A activity.

Analysts at Liberum expect cash-rich Rio Tinto (LSE:RIO) and BHP (LSE:BHP) to pursue deals, partly so they can more quickly alter their commodity mix to boost investor appeal.

This has already led to speculation around possible bids for FTSE 100-listed Glencore, given that it offers exposure to energy transition metals such as copper, cobalt and nickel.

Liberum's other picks for potential M&A activity in the sector include Petra Diamonds (LSE:PDL), which may interest Rio Tinto, and the Ecuador-based copper-gold explorer SolGold (LSE:SOLG).

It also sees Kenya-based Shanta Gold (LSE:SHG) as vulnerable to a bid after two guidance downgrades in 2021, while Zambia's Gemfields (LSE:GEM) is attracting interest after generating significant levels of cash from its emerald and ruby mines.

The potential for M&A action means Liberum regards Rio and BHP as its least preferred stocks in the commodity sector, with price targets of 4,200p and 1,750p respectively.

The resources sector has rallied by 20% since early December but Liberum now considers the run to be near its peak.

The key downside catalyst will be the US Federal Reserve hiking interest rates, but Liberum warns annual results will also highlight the extent of cost inflation impacting mine operations. And it believes that China's intensity of commodity use is waning.

As well as downgrading Rio and Chile's Antofagasta (LSE:ANTO) to “sell” recommendations, it has lowered De Beers owner Anglo American (LSE:AAL) to “hold” with a price target of 3,020p. Glencore is rated at 425p among six “buy” recommendations, alongside Gemfields, Petra Diamonds and Shanta Gold.

Ukraine-focused iron ore company Ferrexpo (LSE:FXPO) is also on the buy list, having been under significant selling pressure due to tensions in the country.

Liberum said: “Even on our bearish price forecasts and higher production costs, the stock trades at a 27% operating free cash flow yield in 2023. For the Ukraine stand-off, our house view is that the situation will eventually de-escalate.”

The sixth stock on the buy list is South African coal miner Thungela (LSE:TGA), which Liberum believes is in a position to return 26% of its current market cap in buybacks and dividends at the full year results.

The big four miners of BHP, Rio, Anglo American and Glencore have had an excellent run on the back of synchronised global stimulus and commodity market reflation, rising by between 51% and 81% since the beginning of 2020.

Liberum said: “For many investors, the sector still offers cheap, long-dated inflation protection, particularly while real rates are negative.”

However, it believes any further commodity price upside assumes that central banks will not engage high/rising inflation and that China will stimulate its property sector and steel industry in order to boost broader economic growth.

Liberum said: “Our commodity view to the end of the year is bearish across the board, with the exception of platinum group metals.” It adds that thermal coal continues to be a “real wild card” due to the continuing withdrawal of funding from the space.

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