FTSE shrugs off Brexit fears as Anglo American leads miners' rebound

Discussion in 'Market News' started by Lily, Feb 22, 2016.

  1. Lily

    Lily Forum Member

    Aug 29, 2015
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    Commodity prices support shares but pound slides on worries about EU future

    Fears that Britain may leave the EU may be knocking the pound lower but shares are shrugging off theses worries as commodity prices support the market.

    Oil continues its volatile way, up more than 2% at $33.72 in the wake of last week’s attempts by producers including Saudi Arabia and Russia to limit output.

    [Metal prices are] benefiting from bets that oversupply will begin to reduce as well as a return of risk-on appetite. There is also perhaps optimism that soft China Business sentiment will result in more stimulus from Beijing and that the nation’s new securities regulator will grease the wheels of the IPO market and get Chinese equities further from their recent lows, recovering lost ground not just this year, but since last summer.

    The pound has slumped as a result [of Brexit fears] and although this might be bad news for holiday markets, it should be good for exporters and will also serve to buoy London-listed equities in general as sterling denominated assets begin to look a little cheaper to overseas investors.

    A successful transformation for Anglo depends on a combination of asset sales and cost cutting. We are concerned that demand for higher cost assets - especially in bulk commodities - will be weak, and buyers will only be interested if assets will be sold at low valuations. Anglo is therefore likely to struggle to complete its planned $3-4bn of divestments in 2016 and $7bn plus of divestments in the longer term.

    If management succeeds, the Anglo share price would likely have further upside, even after the recent rally. If we assume $2.5bn of core EBITDA at spot, an enterprise value/EBITDA multiple of 8 times (reasonable for world class mining assets at a very weak point in the cycle), and net debt of $6bn, Anglo’s equity value would be 746p a share. It really comes down to whether these aggressive restructuring targets are met. In the near-term, we think Anglo’s share price depends on whether management can convince investors these plans are credible. In the longer term, Anglo’s share price depends on whether these plans are actually achieved.

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