Market Report: Xstrata depressed by doubts over covenants

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The Independent Online

Xstrata led the mining sector lower last night after UBS said that the Anglo-Swiss mining group was at risk of breaching covenants.

The analyst Grant Sporre warned the group may come up against a 3 times-gross-debt-to-earnings covenant, which governs around $10bn (£6.7bn) in bank loans, in December 2009.

As a result, he predicts a reduction capital expenditure and in the final dividend for 2008. He does not anticipate a payout in 2009. Mr Spore added that the group will probably have to step back from making any more acquisitions in the near term.

"Xstrata's investment case rests on its ability to grow from acquisitions. We believe this strategy is effectively 'on ice' until 2011, when we estimate Xstrata may be in a position to term out its $6bn repayment due in that year," he said, moving the stock to "neutral" from "buy".

The assessment depressed sentiment around the stock, which was already under pressure as the wider sector traded lower on the weak outlook for commodities, and Xstrata ended down 11.33 per cent or 82.5p at 645.5p, claiming first place on the FTSE 100 loser board.

Vedanta Resources, at third place, lost 9.47 per cent, or 63p, to 602p while Anglo American, which was downgraded to "in-line" from "outperform" at Cazenove, retreated to 1450p, down 8.92 per cent or 142p.

Overall, the slump in resource issues outweighed gains elsewhere, dragging the FTSE 100 to 4286.93, down 43.73 points. The FTSE 250 was also weak, losing 106.47 points to 6285.1.

The market avoided further losses thanks to an early rally on Wall Street, where leading indices rose after President George Bush unveiled plans to help stave off bankruptcy at General Motors and Chrysler.

On the FTSE 100, investors moved to capitalise on recent losses in the insurance sector, boosting RSA Insurance to 151.8p, up 11.62 per cent, or 15.8p. Old Mutual was up 5.67 per cent, or 2.7p, to 50.3p, while Admiral gained 2.11 per cent, or 19p, to 919p.

Barclays, up 5.93 per cent, or 8.3p, at 148.3p, and Lloyds TSB, up 6.49 per cent, or 8.2p, at 134.6p, bucked the trend in the banking sector.

Others were weak as investors focused on recent comments by the Bank of England deputy governor, Charlie Bean, that the Government may need to inject more capital into the banking system.

The sector was also hit by Standard & Poor's, the ratings agency which raised its overall assessment of industry risk and said that there was likely to be more volatility in the funding markets. Royal Bank of Scotland was the weakest, losing 6.67 cent, or 3.1p, to 43.4p.

On the second tier, the staffing group Hays was down 1.04 per cent, or 0.75p, at 71.5p, after Morgan Stanley reduced its target price for the stock to 60p from 80p.

Michael Page, whose target was scaled back to 155p from 160p, was stronger, gaining 2.75p to 217.5p.

"For Michael Page, we expect a similar 70 per cent peak-to-trough [earnings] decline as in 2001-03. Hays has even greater exposure to the weak UK [market], and [the] publishing sector is less of a cushion in this cycle, in our view," the broker said.

Among housebuilders, Redrow was down 6.22 per cent, or 11.75p, at 177.25p after Citigroup moved the stock to "hold" from "buy" in a sector note. "The housing sector has continued to endure a rough ride in the last six months with weakening volumes and prices on all fronts. Consumer confidence and unemployment are both weighing heavily on activity, as is the tight mortgage market," the broker said. "None of these factors looks likely to improve in the first six months of 2009, maybe even the whole of the year."

Derwent London was up 2.46 per cent, or 18p, to 750p after Deutsche Bank initiated coverage with a "buy" rating. The broker also started covering Great Portland Estates, which was rated "hold" and lost 1 per cent or 2.5p to 248.5p. "We would expect both companies' portfolio to hold up somewhat better than many of their office-focused peers in the current downturn due primarily to their West End exposure," Deutsche said, setting an 880p target price for Derwent and 265p target for Great Portland.

Among smaller companies, Blacks Leisure slumped to 15p, down 27.71 per cent, or 5.75p, after Seymour Pierce initiated coverage with a "sell" rating, saying that it anticipated no dividend for the next two years. "The stock has declined around 65 per cent since September and we remain cautious on upside potential in the medium term," the broker said, adding: "Tough trading conditions look set to continue."

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