“We fail to see why Glencore should trade at a premium to its peers following the merger with Xstrata,” Liberum told clients.
It calculated that Glencore was trading at nearly 20 times earnings at spot commodity prices, more than twice BHP Billiton’s rating.
With Glencore needing to prioritise debt payments over shareholder returns, its investors were pricing in commodity moves that looked fanciful, said the broker.
Thermal coal and copper would need to jump 20 per cent with iron ore falling by the same margin to justify the stock’s current premium to BHP, it said.
Glencore has been valued higher than mining peers because of the returns generated by its debt-financed marketing business.
But marketing now provides just a fifth of group operating earnings and has failed to deliver stable earnings since the flotation, said Liberum.
Glencore closed down 1.4 per cent at 331.2p.
“On a six to 12- month view, we expect the stock will de-rate,” said Ben Davis, a former UBS analyst who took over coverage of Glencore at Liberum last month.
It had been rating the stock a “buy” since June 2011, a month after the flotation.
Thin volume squeezed a quiet wider market with the FTSE 100 up 0.3 per cent, or 20.46 points, at 6,507.65.
Johnson Matthey led the risers, up 5.9 per cent to £29.87, after JPMorgan Cazenove recommended the catalyst maker.
Pace rose 4.8 per cent to 274.5p amid hopes that the US cable broadcasters were nearing another set-top box upgrade cycle.
Netflix was reported as in talks with broadcasters, including Comcast, Time Warner Cable and Suddenlink to bundle its on-demand video service. The North American market provides more than half of Pace’s annual sales.
Royal Bank of Scotland led the banks lower, down 1.4 per cent to 371.7p.
Merrill Lynch turned cautious, partly on the risk of regulators “moving the goal posts” again on capital ratio requirements.
Flak maker Chemring lost a further 4 per cent to 211.1p in the wake of Friday’s profit warning.
Chemring may need another dividend cut as, with the Suez Canal closed to munitions shipments, cash generation was under pressure ahead of its loan covenants tightening next year, dealers said.
Iraq expolorers were in demand after DNO International of Norway reported that oil from its Tawke oilfield in Kurdistan had flowed at a record rate.
Genel, which owns 25 per cent of Tawke, added 1.3 per cent to 987p while neighbour Afren was bid 7 per cent higher at 145.6p ahead of a trading update next week.
“The discount rate that the market ascribes to Kurdistan-focused names is too high,” said Citigroup. “While regional tensions remain challenging, the strengthening relationship between Kurdistan and Turkey could see sustainable oil exports and the completion of long-term gas supply agreements over the next three to six months.”
Assets in Kurdistan and the Falklands were becoming increasingly attractive as, with exploration costs rising, it was now cheaper for oil majors to buy oil discoveries than to make them, Goldman argued.
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