Deutsche Bank Sees Debt Levels 'Critical' In Upstream Metals & Mining; Upgrades CONSOL, Downgrades Freeport-McMoRan

• CONSOL Energy Inc (NYSE: CNX) shares have plunged 53 percent year-to-date, while shares of Freeport-McMoRan Inc (NYSE: FCX) are down 54 percent.
• Deutsche Bank’s Jorge Beristain upgraded the rating on CONSOL from Sell to Hold, while downgrading the rating on Freeport-McMoRanfrom Buy to Hold.
• Following the slowdown in China, the devaluation of the yuan and lack of supply disciple, Beristain said that Precious Metals stocks should be favored to Industrial Metals & Energy stocks.

Analyst Jorge Beristain mentioned that lower commodity prices, along with years of deficit spending and poor M&A decisions, are expected to have a negative impact on the balance sheets of mining companies. Several companies are likely to face credit downgrades, re-financing, asset sales and recapitalizations, he added.

“Against this backdrop we now favor Precious equities on a relative basis following weaker-than-expected Chinese growth, lack of supply discipline and China's August devaluation,” Beristain wrote.

While gold offers a hedge against global uncertainty, stemming from the devaluation of various currencies including the Yuan and the Brazilian currency, the precious metal is not immune to rate hikes in the short term, the analyst pointed out.

CONSOL: Balance Sheet Concerns Remain, But Better Valuation

Although the company’s current stock valuation reflects a more balanced risk-reward position, after a 55 percent share price, concerns related to its balance sheet remain, the Deutsche Bank report stated.

The company’s growth prospects dependent to a large extent on successful asset sales in an “already crowded market.” The price target has been reduced from $14 to $13.

Balance Sheet Strain Remains A Concern Area For Freeport

Beristain pointed out that Freeport-McMoran has been taking steps to reduce costs and capex, besides having completed a $1 billion equity offering in 3Q15.

The ongoing strain on the company’s balance sheet indicates the “likelihood of further share issuances at the FCX-level (another $1bn shelf filed) and diminished likelihood of widely anticipated $2-3bn E&P IPO,” the report added. The price target has been reduced from $17 to $11.