Weekly broker wrap – resources in focus, AGO and ORI upgraded

Founder of FNArena
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One major point of disagreement by stockbrokers remains the future and outlook of energy and mining stocks. Is it all a temporary out-of-love moment on the back of yet another loss of momentum for the global economy or something much more sinister driving the persistent underperformance for the higher risk end of equity markets? Time will tell, but this week we focus on the reasons behind movements in the resources sector.

Upgrades

Credit Suisse upgraded Arrium (ARI) to Buy from Hold after noting the recent investor conference highlighted weaker domestic steel demand and prices, although the broker saw some offset via cost cutting initiatives. Recycling was also weaker due to lower commodity prices, while the company has also trimmed iron ore production expectations. Forecasts were cut in response. Despite the bad news, there was still enough upside to allow the broker to upgrade. Sentiment is positive.

Atlas Iron (AGO) found its way to Buy from Hold on CIMB’s books, the broker having said the initial exploration results at Corunna Downs are significant because there is now a potential to increase the mine life in the northern Pilbara. The thick intersections that are near surface and within trucking distance to port, should lead to favourable economics if a resource is proven, said CIMB. That and a weak share price led to the upgrade. Sentiment for the stock remains positive.

Orica (ORI) also found its way to Buy, upgraded from Hold by UBS following the company’s 15% relative underperformance since March and its discount to current valuation. UBS also removed Kooragang Island from forecasts because of its diminishing return profile and demand requirements. Imports can fill East Coast needs through to 2020, said UBS. Sentiment is very positive on seven Buys and one Hold.

Downgrades

Downward revisions to earnings forecasts for resources companies have been nothing but spectacular in the past week.

Alacer Gold (AQG) was pruned to sell from Hold by JP Morgan. The broker noted that while March quarter production was affected by weather related interruptions, there are still some areas of concern. Low recoveries persisted at Copler, despite the solid result achieved through high grades. There were continued declines in grade at Higginsville and unit costs escalated across all assets. The broker says it is cautious about delivery of the $60 million in savings the company plans and the medium-term operational turnaround, noting the profitable Copler is subsidising the Australian assets. Sentiment remains positive post the downgrade.

Ausenco (AAX) was downgraded to Hold from Buy by Deutsche Bank, the broker viewing the risk/reward as balanced. Deutsche Bank said Ausenco is a well managed and diversified company but, as confirmed by the profit warning, the near-term outlook for the core minerals and metals business is uncertain. The company has said it will miss prior guidance, citing margin pressure and client hesitation. The broker also said it expects negative investor sentiment to continue to weigh on the stock until medium-term earnings visibility improves. Sentiment for the shares is positive.

Gindalbie Metals (GBG) was the unlucky recipient of two downgrades; JP Morgan cutting to Sell from Hold and UBS going to Hold from Buy. JP Morgan didn’t like the fact the production ramp up at Karara is proceeding slower than planned, with only 283,000 tonnes of magnetite concentrate sales in the March 2013 quarter. What was of more concern was the joint venture partners have had to contribute $160 million in additional funds to provide for working capital. Gindalbie also had to borrow $30 million from Ansteel to maintain liquidity. With too much financial and operating risk, the broker downgraded. UBS is also concerned about the liquidity position of the Karara JV, at least until nameplate capacity is achieved on the magnetite project. Sentiment on the stock is negative.

Note: FNArena monitors eight leading stockbrokers on a daily basis and the tables are based on data analysis from the week past concerning these eight equity market experts. They are: BA-Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, CIMB (formerly RBS) and UBS.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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