Three miners tipped to return 38-58%

A spectacular performance by miners in 2016 was always going to be a hard act to follow, with the FTSE 350 Mining Index more than doubling in value. But at this late stage of 2017, commodities-focused investors can have few major complaints about how this year has turned out, with more ups than downs.

Now, as we head into 2018, sector analysts at Barclays say there's good reason to think their positive stance on the mining sector can continue.

A benign macroeconomic backdrop is a major help, but so too is the sector's poor record on M&A. Barclays thinks this will mean firms are much more likely to use their increasing cash piles on capital returns. As a result, the broker believes its favoured names of Rio Tinto, Glencore and South32 can return 38%, 40% and 58% respectively of their market caps over the next four years.

Barclays said: "Investors are nervous about M&A, but a lack of available tier 1 assets is one constraint, while the sins of the past still loom large. So broadly we expect boards to prioritise returns as a default use of cash."

The bank makes the interesting observation that 52% of M&A spend between 2005 and 2016 has been written off. Structural constraints mean that capital expenditure is also unlikely to rise beyond current guidance, while Barclays believes operational spending will only rise at modest rates.

One note of caution from the bank concerns the potential impact of the slowing Chinese housing market on commodities demand. However, this is likely to be offset by improvements elsewhere as industry PMIs are accelerating in Europe, the United States and major emerging market economies.

For 2018, Barclays has upgraded its forecasts most materially for aluminium (up 22% to $1.10/lb) as well as for zinc and iron ore. Despite slightly stronger FX, this delivers an average earnings per share (EPS) upgrade for the sector of 39% in 2018.

Barclays said: "We are most bullish on aluminium, zinc and nickel over the next two years.

"Iron ore appears more vulnerable on fundamentals but a rising cost curve means we should see producers continue to defend the $50/t level, so we would not be too bearish. Precious metals look relatively unexciting."

Barclays has made no changes to its ratings today, with Glencore its top pick based on commodities mix, underappreciated asset quality, strong cash flow and organic growth prospects.

The aluminium exposure of Rio Tinto and South32 also impresses Barclays, along with the pair’s balance sheet strength and cash return potential.

But the broker has been busy tinkering with price targets.  

In alphabetical order, Anglo American goes up 50p to 1,270p, Antofagasta up 22% to 965p, BHP Billiton from 1,300p to 1,375p, Ferrexpo from 130p to 215p, Glencore up 30p to 430p, KAZ Minerals doubles to 810p, Rio Tinto nudges up 10% to 4,500p, South32 from 220p to 245p and Vedanta Resources goes from 600 to 750p.

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.