Which of these 8 miners is worth buying?

Credit Suisse has taken a red pen to mining sector profit forecasts both for this year and next, downgraded ratings on key players, and slashed target prices. The broker reckons bulk metals have entered a multi-year trough, and have not reached the bottom, which "spells doom for the marginal producers and gloom for the survivors".

"In iron ore, major miners seem determined to add ever more capacity to a saturated market while China steel demand is sliding," says the team at Credit Suisse. "The price has been a casualty. Short term cyclical improvements aside we think iron ore is only part way through a protracted multi-year downturn due to weak demand (Chinese property) and robust low cost supply."

"Over the past 12 months marginal supply has exited the market, primarily from domestic mines in China and small marginal producers in Africa and North America. With supply growth expected to re-accelerate in H215 another wave of production closures will be required in our view particularly if Chinese production has reached a less price elastic level."

Price forecasts for all the base metals - aluminium, copper, zinc, lead and nickel - have been cut for 2015, and also for bulk - iron ore, hard coking coal and thermal coal. Expectations for platinum, palladium, rhodium and silver has also been lowered both for this year and next.

Expect steady pricing for gold, says Credit Suisse, as strong demand in Asia and slowing mine production offset low inflation and a strong dollar. A slow rise is forecast for silver, "but no price break-out".

Despite large cuts to its iron ore and coal forecasts, the broker admits that "a fair amount of pessimism is already priced in" and that dividend yields among the heavyweight miners of over 5% "should provide a degree of valuation support together with ongoing capex reductions".

"However, we expect iron ore prices to move lower again in H215, we are up to 30% below consensus and dividends, with the exception of Glencore, are uncovered by free cash flows on our estimates."

What needs to change for investors to buy miners again?

At least one of the following trends must change if investors are to get back into the sector, says Credit Suisse, although none are currently on its near-term horizon.

"1) China property outlook: weakness will continue to weigh on commodity demand, particularly carbon steel raw materials;

2) US dollar strength: the US$ run has paused for now but our strategists believe we are only part way through a multi-year USD bull market;

3) Over-supply: producer led cuts appear unlikely;

4) M&A: trough cycles typically bring consolidation; we would not rule out large cap mergers but bolt on acquisitions appear more likely."

Stock-by-stock

Glencore is the clear favourite at Credit Suisse. The broker keeps its 'outperform' rating and 320p target price, largely predicated on the miner's sector-leading free cash flows, underpinned by cash from the marketing business - more than half of operating profit - which covers the annual dividend on its own. Exposure to base metals over iron ore is also a plus.

BHP Billiton is cut from 'neutral' to 'underperform' and the price target is slashed from 1,800p to just 1,400p, which includes the S32 offshoot. Credit Suisse has cut profit forecasts by 36%, which puts the shares on a forward price/earnings (P/E) ratio of 30 times post S32. It does not expect a dividend increase for five years, either.

Rio Tinto's heavy exposure to iron ore means its 'neutral' rating is unchanged, although the price target is cut from 3,400p to 2,800p. However, the broker thinks Rio will not cut the dividend having built up the balance sheet over the past few years.

Elsewhere, Anglo American (1,400p), Antofagasta (710p), Vedanta (500p) and Kazakhmys (255p) are all rated 'neutral'. There is medium term value in Anglo, says Credit Suisse, although concerns around the balance sheet will likely persist until its sells non-core assets.

Problems with the project pipeline, licensing delays and a $400-$900 million desalination plant for water at its Los Pelambres mine are bad news for Antofagasta, reckons the broker. The valuation is "uncompelling", too, which easily offsets low operational and financing risks relative to peers, best-in-class balance sheet and improving growth outlook.

Vedanta could do well if oil prices get back above $70 a barrel, according to Credit Suisse. Until then, however, the balance sheet and earnings should remain under pressure.

Focus at Kazakhmys has turned to project delivery at Bozshakol and Aktogay now that restructuring is over. But free cash flows are unlikely to turn positive until late 2017, and net debt could peak at over $3 billion. If projects are delivered on time, the shares could be worth more.

Finally, Ferrexpo, the iron-ore producer operating in Ukraine, is worth only 50p and remains 'underperform', says Credit Suisse. "If iron ore prices remain at current levels into 2016, free cash flows turn negative, and a covenant breach becomes a major risk."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.