Metals & Mining : 2019: opCF and dividends to rise, measured M&A activity

For Metals & Mining , the three main takeaways from 2018 were: (1)  prices that, as in other sectors, were weaker than at the start of 2018; (2)  geopolitical tensions and economic sanctions that were in evidence ; and (3)  the risk of a sector slowdown, the consensus being for weaker global growth in 2019 and 2020. In 2019 , Metals & Mining stand s to benefit from a weaker dollar (rising interest rate s in the Eurozone will be favourable to the single currency). For the coming year (see Commodities Price Outlook 2019/20 ), our commodities analysts are bullish on : (1) gold , as the greenback is expected to weaken ; (2) silver , since closely correlated to gold; (3) platinum , as it is increasingly perceived as a precious metal, (4) aluminium , the alumina market continuing to tighten; (5) copper , theoretical supply and demand being expected to hold up; (6) zinc , expectations being that prices will pick up as stock s are relatively low; and (7) nickel , the market continuing to tighten given the rise in demand for class 1 nickel. On the other hand, the outlook is bearish for : (1) palladium , currently priced above its theoretical level; (2) iron ore , prices being expected to weaken given that Chinese steel demand is set to decline. Finally, the outlook is neutral for  natural gas . As regards issuers, after bottoming at 12.4% in 2015, t he sector’s average EBITDA margin has stabilised at around 18% since 2017. We expect much the same level in 2019 and 2020 . When reasoning in monetary terms, between 2015 (when the sector’s profitability hit rock bottom) and 2020, a near twofold increase in sector EBITDA is on the card s . On the other hand, capital expenditure in 2020 is expected to be almost half what it was in 2013 . There follows that, from 2018, operating cash flow (i.e. EBITDA less capital expenditure) can be expected to recover to its 2010 peak . The rise in operating cash flow ( op CF) can be expected to pave the way for further deleveraging by issuers . According to Moody’s, in the four years between 2014 and 2017, the sector’s adjusted net debt-to-EBITDA ratio has improved from 2.9x to 2.1x . Now that financial flexibility has been restored, it is likely that shareholder remuneration will increase . In the short term, we see no reason why an M&A cycle should kick in , as : (1)  the uncertainties at economic level can be expected to dissuade issuers from taking risks; (2)  the gradual rise in interest rates is not favourable to highly leveraged deals; (3)  issuers have stated that improving productivity is a strategic priority over the next 18-24 months; and (4)  environment al constraints (carbon emissions, water usage, etc.) are weighing more heavily in investment decisions, leading to a more selective identification of potential targets .