Liberum Capital: The Mining Market’s New Darling

Anglo American set for further trouble, Liberum Capital believes…

Mining investors have found a new market darling. It is not BHP Billiton’s spin-off, quirkily named South32, after the line of latitude connecting its mines south of the equator. Nor is it Rio Tinto, which surprised to the upside with its half-year results last week. It is none other than Ben Davis, a bespectacled research analyst at Liberum Capital in London.

“People’s expectation of the future is set by their experience in the immediate past,” according to mining investor Rick Rule, an adroit reader of the market’s psychology. Nowhere is the trend more visible than in the business press, which has a habit of latching onto whichever financial analyst was right last time around and hanging on their every word.

Six months ago, the firm favourite was Sanford Bernstein’s Paul Gait, a bull on Glencore, who plotted the group’s pursuit of Rio Tinto with finesse. Sometimes Gait was so far ahead of the curve, it was difficult to believe he was not personally being briefed by Glencore.

In September last year, Gait began musing about a merger between Rio and Glencore, putting Rio’s vast iron ore operations in Australia under the management of Glencore’s trading division in Switzerland. A deal would “marry the world’s most important set of mining assets to the most sophisticated commodities trading business,” Gait said.

At the time it was an outlandish suggestion, with Rio’s $99bn market cap outweighing Glencore by a hefty $23bn, but the following month, both groups confirmed that an “informal enquiry by telephone call” had indeed taken place. Gait’s more elaborate theories, envisaging a carve-up of Rio’s assets between Glencore and officials in Beijing, promptly became mainstream business news.

Fickle Mistress

But the market is a fickle mistress and so too is the financial press. As the mining rout has extended from iron ore (where Glencore is absent) to copper and zinc (where it is heavily exposed), the group’s shares have fallen to an all-time low. With Glencore down 60 per cent since listing in 2011, Rio now looks, at least for the moment, out of range.

The market’s attention has therefore turned to the one analyst most consistently bearish on Glencore: Liberum Capital’s Ben Davis. His perpetual sell rating on the stock was previously, trivially put down to a grudge between him and Glencore’s ruthless CEO Ivan Glasenberg. But with metal prices plunging, Glencore has been left looking the highest-cost and most levered out of its mega-cap peers, suggesting Davis has been right all along.

Davis has warned that Glencore’s dividend and credit rating are both at risk of a downgrade, potentially relegating its debt status to junk. “The first thing to go will be the dividend,” Davis warned last month, “then assets, then the credit rating. They are in constant dialogue with the agencies and at the moment they are only two notches above junk at BBB.”

Davis also believes Anglo American needs to axe its dividend, as it did in 2009 (for the first time since the Second World War). But he is more relaxed about Rio and BHP both leaning on cheap debt to backstop their dividend policies, saying “they may as well take advantage of the low cost of financing.”

Liberum’s view has become so sought after that when the firm issued a “reluctant sector upgrade” last week, each of the diversified majors saw a huge relief rally in their shares: Rio rose 4 per cent, whilst BHP bounced more than 5 per cent. But for Anglo American there was no reprieve. The group remained on Liberum’s sell list and shares are currently trading at their lowest level for thirteen years.