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Miners pull FTSE down despite Rio Tinto bid talk

This article is more than 15 years old

Leading shares ended a volatile week on a downbeat note, as falls in several of the heavyweight mining stocks outweighed positive price moves from the banks.

With metals such as copper suffering profit taking after their recent rises, Eurasian Natural Resources Corporation lost 35.75p to 444.25p, Antofagasta fell 4.5p to 516p and Anglo American ended down 57p at £11.95. Kazakhmys closed 18.25p lower at 378.75p after Deutsche Bank lowered its recommendation from hold to sell in a note on the mining sector. The bank also moved its rating on BHP Billiton from buy to hold. BHP, down 50p at £14.09, is rumoured to contemplating acquisitions, with possible targets said to include US group Potash Corporation or Australia's Woodside Petroleum.

There was even talk of a renewed bid by BHP for Rio Tinto, if the latter's controversial $19.5bn investment from China falls through. Initially a surprise ruling in Australia blocking the $1.7bn acquisition of OZ Minerals by China's Minmetals suggested the country's regulators would look dimly on Chinalco's planned deal with Rio. But the mood changed later after Chinalco said it had set up a $21bn loan to help finance the investment in Rio. Helped by the BHP bid talk and Deutsche raising its price target from £26.27 to £26.63, Rio rose 96p to £24.78.

Xstrata also moved higher, adding 11p to 474.75p as Deutsche lifted its price target from 531p to 569p.

Among the mid caps, gold and silver producer Hochschild Mining climbed 30.75p to 217.75p after the company said industrial action at its four sites in Peru had come to an end after a week.

Barclays led the way in the banking sector, up 33.7p to 173.8p as it confirmed reports the City regulator had stress tested the bank, and found it did not need to raise capital. Lloyds Banking Group added 7.1p to 76.1p and Royal Bank of Scotland was steady at 26.6p after they both announced plans to exchange or buy back subordinated debt to boost their balance sheets. Sandy Chen of Panmure Gordon, a notable bear on the banks, was for once reasonably upbeat following these moves. He said:

"Lloyds has announced an offer to swap up to £7.5bn of junior Tier 2 debt into £4.4bn of senior debt, RBS has announced a similar offer on £14.8bn of Tier 2 and Tier 1 debt, and Barclays is reportedly considering a debt swap as well.

"From a capital perspective, these debt swaps are definitely a positive move for the banks in boosting Core Tier 1 capital. Our concerns about global macro and counterparty risks (e.g. AIG and monolines) remain undiminished, but we do see these Tier 2 to Senior debt swaps as a rare piece of good news for the banks."

Overall the FTSE 100 ended 26.35 points lower at 3898.85, dragged down by an opening decline on Wall Street. The Dow Jones Industrial Average was around 120 points lower by the time London closed, as profit takers moved in following news that Wall Street had entered bull market territory, up 21% since its recent low on March 9.

Citigroup strategists said the recent rises in the FTSE 100 had all the hallmarks of a typical 15% bear market rally, but that there was a chance it could in fact prove to be a turning point for the market. Citi said:

"Following a 20% straight fall, which we had to March, there is greater chance that the turn that follows is the end of the bear market. Our checklist [for forecasting the start of a bull market] shows more than half of the factors are in place. Valuation, interest rates and lead indicators say yes. But inflation and GDP forecasts say not yet. Earnings forecasts are still a no, but are getting much closer."

Elsewhere Prudential fell 20p to 327p as hedge fund Lansdowne Partners increased its short position in the insurer.

Construction business Balfour Beatty slipped 1.75p to 333.25p despite Morgan Stanley upgrading from underweight to equal-weight and upping its price target from 370p to 390p. The bank's analyst Robert Muir said:

"Balfour offers the relative attractions of a legacy of prudent accounting, and strict selectivity on new projects. We think this reduces future risks to earnings and cash.It should be less susceptible to write-downs and the more significant cash unwinds that may affect peers over the downturn. Accordingly, we now regard the stock as fair value. Closing the M25 PFI deal in early April would be a positive sign."

But engineers Tomkins and Spirax-Sarco Engineering were lifted by Goldman Sach raising its recommendations on the businesses. Tomkins, moved by Goldman from sell to neutral, added 7.25p to 127.25p while Spirax, raised from neutral to buy, rose 54p to 864p.

Lower down the market pharmaceutical group Vernalis added 0.53p to 3.18p after favourable study results for its oral treatment for Parkinson's Disease.

Finally oil and gas group Bowleven slid 26.75p to 85.5p after its proposed suitor cut the possible offer price from 150p a share to 100p. Bowleven said it was discussing the offer with its shareholders, but could see no reason why the bidder had slashed the offer price.

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