Deutsche Bank believes the year-to-date commodity price rally appears to be driven by incrementally positive data from China and a weaker USD. They don’t expect this trend to continue and still believe supply cuts across most commodities are required.
They remain concerned that supply cuts may now take longer, with improving options for marginal producers in the last three-months, and capacity reductions grind slower-than-expected on competing stakeholder interests and high barriers to exit.
Debt levels for the sector remain a concern although options have improved.
“The DB Americas Metals & Mining sector’s net debt is $96bn, 56% of the current $169bn market capitalization. On average, Net Debt/EBITDA for the sector is 3.0x, down from 3.3x QoQ but well above 0.4x five years ago. Debt is trading at higher levels, now 86c on-the-dollar (from 73c QoQ) but we still remain concerned with over-leverage, particularly if commodity prices correct downwards. A number of companies have recently positioned or executed equity issuances, a trend that should continue while ever the unexpected window of liquidity and improved sentiment for the sector remains.”
The firm is downgrading six equities, particularly in Precious metails, following strong rally:
“We now have six Buy-rated stocks including Alcoa, Kaiser Aluminum, Newmont, Steel Dynamics, Constellium and Vale. Following fairly minor commodity revisions, our Price Target’s are largely un-impacted. However, after a strong 1Q in Precious, we have downgraded Barrick, Hecla and Pan American to Hold and Coeur to Sell. In Steels we have now downgraded Nucor and Reliance from Buy to Hold. We continue to favor select companies with relatively strong Balance Sheets and businesses that can defend margins through low cost, contractual sales or patented technologies. We still recommend some gold exposure through Newmont. We recommend avoiding Sell-rated Franco-Nevada, Goldcorp, Coeur, Teck Resources and highly leveraged Sell-rated US Steel and AK Steel.”