Deutsche Bank gives top mining picks

Published Mon, Oct 3 201610:53 AM EDT

Deutsche Bank on Monday upgraded three stocks in the metals and mining sector to buy from hold, citing strength in the commodities complex and improving fundamentals. "YTD commodity price improvements and equity issuances have resulted in much stronger balance sheets," wrote equity analyst Jorge Beristain, pointing to a 12 percent rally in metals and mining commodity prices last quarter. "While the sector has further to go, balance sheets have improved, allowing companies greater options," wrote Beristain, estimating that $27 billion of capital market activity has been announced or completed year to date among those metals and mining firms in Deutsche Bank's coverage universe. In the coming quarters, the analyst believes a combination of equity issuance, extension of debt maturities and improving cash flow will lure investors into the space. Here are the three stock picks from Deutsche Bank: Barrick Gold, 1 year Source: FactSet " Barrick has taken significant steps to restructure its portfolio and streamline its operating model," wrote Beristain, including as examples a $3 billion bought deal in 2013, and a $3 billion debt target reduction, which was achieved in 2015 through the sale of assets. This year, he explains that a $2 billion debt target reduction target is in place, further highlighting the company's commitment to reduce its debt load. Investors have taken notice of those efforts, sending shares of Barrick Gold up more than 140 percent in 2016. But even with the strong gains this year, analysts at Deutsche Bank predict shares of the world's largest gold producer could trade even higher at $22 in the next 12 months. That level implies an upside move of 24 percent from Friday's close. Freeport-McMoRan, 1 year Source: FactSet Shares of the world's second-largest copper producer are up 62 percent in 2016, due to a cleaner balance sheet and the potential for higher demand for the metal. "Ongoing copper growth projects should result in ~1bn lbs/year (+25 percent) of incremental copper in 2016," wrote Beristain. He explains that Freeport-McMoRan has divested most of its energy exposure through the sale of assets in the Gulf of Mexico, valued at around $2 billion. Likewise, management at the company has offset low copper prices through asset sales, cost reductions and $2 billion in equity issuance. In the next 12 months, Deutsche Bank predicts shares of Freeport-McMoRan could trade as high as $12.50, implying a gain of 15 percent from Friday's close. Pan American Silver, 1 year Source: FactSet Shares of the Canada-based silver producer are up more than 170 percent this year on improving trends in the mining sector, and the company's strong fundamentals. Beristain wrote: " Pan American 's medium-term outlook depends on continued cost reduction efforts and successful execution of brownfield expansion at La Colorada and the Dolores pulp agglomeration. The company's strong balance sheet gives it substantial flexibility to pursue acquisitions which could translate into significant value for its shareholders." In the next 12 months, Deutsche Bank forecasts that shares of Pan American could trade as high as $20, implying a gain of 13 percent from Friday's close. Apart from the three upgrades above, Deutsche Bank already had buy ratings on other mining companies such as Vale ( VALE ), Newmont ( NEM ), Silver Wheaton ( SLW ), Alcoa ( AA ), Allegheny Technologies ( ATI ) and Nucor ( NUE ).

A dump truck is prepared to unload ore into a crusher at Freeport McMoRan's Grasberg copper and gold mining complex in Papua province, Indonesia.

Dadang Tri | Bloomberg | Getty Images

Deutsche Bank on Monday upgraded three stocks in the metals and mining sector to buy from hold, citing strength in the commodities complex and improving fundamentals.

"YTD commodity price improvements and equity issuances have resulted in much stronger balance sheets," wrote equity analyst Jorge Beristain, pointing to a 12 percent rally in metals and mining commodity prices last quarter.

"While the sector has further to go, balance sheets have improved, allowing companies greater options," wrote Beristain, estimating that $27 billion of capital market activity has been announced or completed year to date among those metals and mining firms in Deutsche Bank's coverage universe.

In the coming quarters, the analyst believes a combination of equity issuance, extension of debt maturities and improving cash flow will lure investors into the space.

Here are the three stock picks from Deutsche Bank: