Glencore and two other top picks in the mining sector

Metals prices are rising and production is tipped to follow suit, writes Graeme Evans. This should have significant benefits for these mining stocks.

A bullish verdict on the mining sector by analysts at Macquarie provided some comfort to investors this week, particularly those who have made Glencore one of our most bought FTSE 100 stocks in recent months.

The note from Macquarie looks favourably on the prospects for production in the current quarterly reporting season, with Glencore as well as Randgold Resources and Antofagasta forecast to deliver the strongest momentum.

Looking beyond Q3, Macquarie's metals and mining team picks Glencore, BHP Billiton and Anglo American as preferred stocks in the sector. Price targets for the trio are 440p, 2,000p and 960p respectively.

Glencore hasn't been short of support on our platform, with the London-based stock consistently one of the top three picks for blue-chip investors.

This follows a sharp drop in value during 2018, with the commodities trader and miner down as much as 27% at one stage. Glencore has had to contend with a long list of issues and challenges, with US authorities recently ordering the company to hand over documents relating to a corruption probe.

Source: TradingView (*)      Past performance is not a guide to future performance

It has also had to untangle a dispute involving Israeli billionaire Dan Gertler that threatened to disrupt its supplies of cobalt in the Democratic Republic of Congo (DRC).

But in keeping with the trend for buy-backs rather than M&A in the mining sector, Glencore responded to the underperformance in its shares by announcing last month it would purchase a further US$1 billion of stock. This will take place in the run-up to its full-year results due in mid-February.

Macquarie, which has an 'outperform' rating on Glencore shares, thinks that a production update due on October 26 will benefit from stronger copper and cobalt output thanks to the ramp-up of its Katanga unit in DRC. The restart of its Lady Loretta mine in Queensland, Australia, should also boost zinc output.

Zinc and copper are forecast by Macquarie to deliver the strongest production increases across the mining industry - at 13% and 10% respectively. The bank said all the commodities it follows were likely to be higher year-on-year, with the exception of nickel.

Up until recently, the gold price has depressed shares in Fresnillo and Randgold in 2018 due to factors including a strong US dollar and weakness in emerging market currencies.

But Macquarie sees an upside for both stocks as the year-end outlook is more favourable, with the dollar and interest rate cycle unlikely to rattle gold, and the sharp sell-off in the equity markets and cryptocurrencies re-igniting some positive sentiment for gold’s defensive attributes.

They have a 6,200p price target on Randgold, while Fresnillo is at 1,020p based on expectations that its recent operational performance has been sound, and that the Q2 downgrade to silver guidance is now fully priced in.

Macquarie's support for BHP Billiton as one of its preferred picks reflects the promise of big share buy-backs following the recent $10.5 billion sale of its US shale assets. Anglo is also seen as attractively valued, given strong cost savings and the likely restart of the Minas-Rio iron ore project early next year.

*Horizontal lines on the chart represents previous technical support and resistance.