Market Report: Valuation worries weigh on Kazakhmys

The mining sector pressured the FTSE 100 last night, with Kazakhmys heading south as traders scrambled to bank profits. The stock lost its sheen, easing by more than 3 per cent or 49p to 1496p, as buyers backed off on news of a larger than expected rise in Chinese consumer prices, with the data sparking concern about further monetary tightening by the country's central banking authorities.

Sentiment also took a hit after analysts at Goldman Sachs sounded a note of caution on the valuation, prompting some to question if the recent rally in the Kazakhmys share price had gone too far.

The persistent strength in the demand for copper, coupled with the devastating quake in Chile, has driven the base metal up by around 14 per cent over the last month. This rise has underpinned gains for copper-exposed Kazakhmys, which, despite last night's fall, is still up more than 20 per cent since the beginning of February.

Highlighting the gains, Goldman said that while the copper market is likely to remain tight, the shares may be discounting the upside. "We believe the share price now reflects a sharp increase in profitability in 2010 and 2011," the broker said, moving Kazakhmys to "neutral".

Antofagasta, another widely followed copper play, fared better, closing 9p higher at 1028p, after being added to the broker's "conviction buy" list. "We expect Antofagasta's Ebitda [earnings before interest, tax, depreciation and amortisation] to nearly triple by 2013, driven by strong volume growth in 2010 and 2011, combined with rising copper prices," Goldman explained, adding: "This should lead to a further rise in the share price."

Overall, the weakness in the mining sector depressed the FTSE 100 to 5617.26, down 23.31 points, while the FTSE 250 fell by 10.85 points to 9854.44. Bid chatter continued to do the rounds around the mid-cap inter-dealer broker Tullett Prebon, down 21.6p at 368.4p, with the latest rumours hinting at the possibility of interest from private equity. A management buyout, or a tilt from one of the exchanges, was also mooted, with Panmure Gordon, while acknowledging the possibility of the former, pegging its hopes on the latter.

UBS, on the other hand, saw renewed interest from American rival GFI as more likely. "We see few revenue synergies from a combination of Tullett with GFI," the broker said. "However a combination of the businesses could save on overhead costs ... we think that £30m of cost synergies or 13 per cent of Tullett's overheads could be achieved."

Further afield, Connaught, the subject of bid rumours on Wednesday, added 6p to 308.5p as the speculation continued, with traders linking it to private equity buyers. After the close, the company said it had "received no offer approaches, formal or otherwise".

Over in the banking sector, Barclays came under pressure, losing 4.1p to 343.75p, with traders busy speculating about possible retail bank targets in the US. The chatter was based on recent reports suggesting that Barclays was looking to grow its American deposit base. HSBC was also held back, losing 11.5p to 694.6p after saying that data theft by a former employee had affected up to 24,000 past and present Swiss client accounts. Lloyds proved the most resilient of the lot, closing 1.28p higher at 56.54p.

The bears were on the prowl around ARM, the semiconductors group, which fell by 3.1p to 227.5p after RBS analysts abandoned their "buy" stance. The change of heart was down to valuation, with the broker saying that, though it remained positive about the company's prospects, it felt that ARM's "unique position" was already priced in. "Importantly, based on our ... analysis, the stock discounts long-term Ebit [earnings before interest and tax] margins of 50 per cent and invested capital growth of 6 per cent through [to] 2021, which leaves limited room for disappointment," the broker said, downgrading the stock to "hold".

Elsewhere, Afren, the oil & gas exploration and production group, saw some interest, rising by 2p to 95p following overnight confirmation of its promotion to the FTSE 250. The reshuffle is effective from Monday 22 March, and promises to put some upward pressure on the stock as tracker funds move in. In other changes, Resolution, the insurance-focused buyout vehicle, which was 0.1p firmer at 73.6p last night, will give up its blue-chip berth and move down to the FTSE 250, while the banking group Investec, down 9p at 530p, will begin trading on the FTSE 100.

Babcock International was 3.5p firmer at 530p after Citigroup ran the numbers on a potential combination with VT, which was 2.5p weaker at 672p. Repeating its "buy" on Babcock, the broker said a marriage of the two could make "good strategic sense at the right price", adding: "The number of common shareholders of Babcock and VT has been growing and is now more than 45 per cent, increasing the likelihood that a transaction is done and at an improved but sensible price (eg around 730p). For the shareholders of VT, we continue to believe an offer around the upper end of the second offer (680-715p) is sensible and attractive when compared to the alternative of a standalone VT."

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