Evraz wanes as resource stocks lead FTSE lower

January 31, 2012

 

Evraz was among the FTSE 100 fallers on Monday after analysts raised concerns about the strength of its balance sheet.

Troika Dialog questioned whether investors were right to expect cash returns from Russia’s biggest steelmaker, which switched its main listing to London in November. The broker forecast Evraz to have ended 2011 with net debt of $7.2bn.

“The maturities do not concern us but we are unnerved by the overall debt burden,” said Troika.

Evraz “cannot be allowed to go under” so “can always count on support from state banks”, it said. However, the group’s vulnerable funding position “presents dangers to public equity holders in case of a sustained downturn”, it said.

Troika questioned the wisdom of management’s recent spending, such as a greenfield iron ore project for $160m and a $100m Moscow office. At the same time, Evraz had been “overly frugal with investments in its own asset base” and needed “a substantial catch-up in maintenance spending”, the broker argued.

Evraz closed 2.3 per cent weaker at 4491/2p. The tightly held stock, part owned by billionaire Roman Abramovich, has risen by 23 per cent since transferring its listing to London.

Other emerging market resources stocks were out of favour in the wider market, helping carry the FTSE 100 lower by 1.1 per cent or 62.36 points to 5,671.09.

Essar Energy dropped 5.7 per cent to 1263/4p and Vedanta Resources lost 4.1 per cent to ?11.75.

Lonmin was down 5 per cent to ?10.37 after Goldman Sachs added the miner to its “conviction sell” list. Goldman forecast Lonmin would have to cut capital expenditure, and therefore growth, and may have to raise new capital if the platinum price falls further.

A recent rally in the metal’s price may be unwound by poor European auto sales in the first quarter, with fading demand for diesel catalysts leaving the market in “a significant surplus” in 2012, the broker said. It kept a “neutral” stance on Aquarius Platinum, which retreated by 6.7 per cent to 1791/4p.

Whitbread, the hotel and restaurant business was 2.7 per cent weaker at ?16.44 after Credit Suisse turned cautious, based on concerns that growth from its UK hotels may disappoint.

Reed Elsevier retreated by 2.2 per cent to 523p as the publishing group faced a boycott of its scientific journals. Several prominent scientists have begun a protest against pricing policies at the group’s Elsevier arm, which accounts for about 60 per cent of earnings.

A Merrill Lynch upgrade helped fashion retailer SuperGroup take on 2.2 per cent to 6451/2p.

“SuperGroup’s current valuation underestimates its growth potential, especially internationally,” said Merrill. “Although we expect revenues to grow at circa 30 per cent per annum over the next few years the shares currently trade at only a small premium to the mature UK general retail sector.”

Dixons Retail rose 1.6 per cent to 151/4p, with SocGen upgrading the stock to a “buy” stance. “We are increasingly confident in the outlook for Dixons in the UK, with evidence that the group is winning the battle for supremacy in the electrical sector as other specialists exit,” it said.

Rank Group added 3.2 per cent to 131p after confirming long-running gossip that it was in talks to buy 25 casinos from Gala Coral.

Buying the sites for around ?250m had the potential to enhance Rank’s earnings per share by 33 per cent, according to Morgan Stanley. “The main question marks surrounding the Rank investment case are the structural maturity of bingo, and the use of cash. This deal would increase Rank’s exposure to the more attractive casino market, and would give clarity over the use of its net cash position,” it said.

BTG took on 2.3 per cent to 331p on positive results in US final-stage trials of its Varisolve drug. In the first of two pivotal trials, the treatment for varicose veins met all test criteria with no unexpected adverse side effects, BTG said.

Deutsche Bank reckoned on a 90 per cent chance of US approval for Varisolve, which BTG management say could generate peak sales of between $250m and $500m a year.

Among small caps, Nature Group dived 11.4 per cent to 601/2p on news its insurer was refusing to pay out a claim. The waste treatment group had claimed ?2.45m for property damage and loss of business following an explosion last year at a treatment facility in Gibraltar.

New World Oil & Gas lost 10.3 per cent to 93/4p after the explorer said it intended to raise $35m in February.