Investing.com -- RBC Capital Markets sees mounting risks for diversified European miners amid escalating U.S.-China trade tensions, warning that a sustained downturn in commodity prices could cut sector earnings from 13% to as much as 37%.
In a Thursday note, the brokerage outlined a scenario-based framework using the industry cost curve to assess potential declines, with copper and iron ore identified as the most vulnerable.
“If commodity prices fall from current spot levels to the 90th and 75th percentile of their respective cost curves, we see sector earnings down 13% and 37%,” analysts led by Ben Davis wrote.
In the bear case, spot copper could fall 41% to $2.50/lb, and iron ore could drop 34% to $64/t. Analysts believe that even if tariffs are rolled back, “lasting damage from broken relationships and uncertainty” will weigh on the outlook.
Glencore PLC (LON:GLEN) stands out as one of the more defensively positioned miners. RBC projects the company’s spot EBITDA could drop by 8% and 26% in the two aforementioned scenarios, “versus the others at -23% and -42%,” the report notes.
Glencore’s coal exposure and marketing business offer relative stability, though special dividends would likely be shelved in downturn scenarios.
Meanwhile, base metal producers such as Anglo American PLC (LON:AAL) and Antofagasta (LON:ANTO) are flagged as particularly exposed due to high cost structures and valuation multiples.
Still, Antofagasta has been upgraded to Sector Perform from Underperform as analysts highlight some de-risking after recent share price declines.
According to RBC, Anglo is currently pricing in $4.63/lb copper, making it susceptible to underperformance if prices correct.
On the other hand, Norsk Hydro ASA (OL:NHY) is seen as a more defensive base metals play, already reflecting an aluminium price of $0.90/lb, in line with the 75th percentile cost level.
“NHY has substantially de-rated and is already pricing in an aluminium price of $0.90/lbs making it the most defensive exposure among the base metals,” the analysts said.
They upgraded the stock to Outperform, pointing to “an attractive risk reward at these levels considering NHY’s defensiveness and its exposure to the European stimulus story.”
Iron ore producers such as BHP Group Ltd (LON:BHPB), Rio Tinto (NYSE:RIO), and Vale also face earnings pressure in a weaker commodity environment, but are somewhat shielded by stronger balance sheets and already-discounted share prices.
Among precious metals, Anglo American Platinum Ltd (JO:AMSJ) and Sibanye Stillwater (NYSE:SBSW) also offer downside protection. Analysts note that platinum group metals (PGM) and coal producers have the most defensive commodity basket, with prices “already firmly into the cost structure.”
Overall, RBC’s top pick remains Glencore in the current backdrop, while Anglo American is viewed as the “least preferred” name.