Why one bank’s watching Glencore Xstrata this year
2013 was a tough year for miners, with metal prices falling and several companies suspending projects and cutting costs. What's more, the instrumental Chinese economy saw a slowdown over the year.
But despite a persistently bad performance in global equities for the sector, Saxo Bank has upped its view to 'positive' on miner Glencore Xstrata.
Despite performing persistently badly in global equities since the beginning of 2011, Saxo thinks things are going to pick up for metals and mining companies.
Bloomberg's Europe 500 Metal & Mining Index bottomed in early July 2013, which seems to be providing a base in the current economic expansion, says head of equity strategy Peter Garnry.
Glencore Xstrata itself delivered better-than-expected results in the first half of 2013, with strong increases in production across most of its commodities. Shares rose over twenty per cent in the wake of the results.
The company's generation of free cash flow has improved, too, with synergy from last May's Xstrata acquisition already "working its way through to the operating profit line."
But Garnry says that the bank is "not impressed by the return on invested capital" – it's expected to be just 6.1 per cent over the next 12 months.
However, it expects that an accelerating economy will see the figure revised up "several times" over the next six months.
Taking the current profit generation and valuation into account, the stock is undervalued, and with momentum in its back, the model raises the view to positive from neutral.