Market Report: Miners slide on rising economic gloom

A raft of grim economic news unsettled parts of the mining sector, which eased last night amid rising concerns about a dip in the world demand for commodities

In the UK, the Confederation of British Industry said the economy was on course to contract by 3.3 per cent this year, recording its worst showing in a single year since the end of the Second World War, while in Japan official figures revealed that the economy had contracted by 3.3 per cent in the last quarter of last year, its worst performance since the 1970s. News from Indonesia – which expanded at its slowest pace in more than two years – also sullied the mood, depressing metals prices as traders sold on fears of a drop-off in demand.

For Eurasian Natural Resources Corporation, which fell to a low of 376.25p before closing flat at 387p, the gloom overshadowed an endorsement from Morgan Stanley.

Raising its target price for the miner to 575p from 500p, the broker told clients that, in its opinion, the market did not fully appreciate the strength of the company's balance sheet and its ability to generate cash "even in a severe downturn".

The broker was less confident about Kazakhmys, which eased to 296.75p, down 3.96 per cent or 12.2p.

"With $2bn [£1.4bn] of gross debt and an amortising loan of around $44m per month over the next 48 month[s], there is little room to manoeuvre on the balance sheet," Morgan Stanley said.

"On our house commodity price estimates, the investments being made in the power business mean that the company continues to burn cash in the medium term, which is something we think it can ill-afford at this point." In the wider sector, Vedanta Resources was down 17p at 650p while Xstrata retreated to 756p, down 9p.

Overall, the FTSE 100 was 54.84 points behind at 4,134.75 after a lighter than normal session owing to the closure of US markets in honour of President's day.

The FTSE 250 – which is seen as more representative of the domestic economic picture – also eased, losing 64.51 points to 6,461.87.

Legal & General failed to shake off its losing streak, retreating to 44.3p, down 10.51 per cent or 5.2p, and recording its fifth consecutive session in the red.

The insurer's stock, which is now trading at levels not seen since the mid-1990s, has come under fire amid concerns that higher corporate bond default assumptions may eat into the company's capital surplus, possibly forcing it to tap shareholders for fresh funds.

Lloyds Banking Group also languished on the loser board, falling another 8.14 per cent or 5p to 56.4p. Moody's downgraded its ratings for the bank, which lost more than 32 per cent of its value in the previous session after news its HBOS unit was on track to report a £10bn loss for 2008.

Alex Potter, an analyst at Collins Stewart, said the group may end up needing extra capital if the HBOS situation deteriorates, warning that as a result, "for the equity investor this means the bank is not that cheap with a chance of major further dilution".

Simon Pilkington, banks analyst at Cazenove, said news of the losses had brought to the fore original concerns that "HBOS would drag Lloyds down with it rather than the acquirer affecting a rescue".

Citigroup also weighed in, and downgraded Lloyds to "hold" from "buy", estimating that the group may end up with a capital deficit of up to £11.2bn.

Also on the downside, Drax fell to 537p, down almost 4 per cent or 3.85p after Morgan Stanley reduced its target price for the stock to 475p from 495p.

"We think headwinds are in place for [the current year] as power prices remain under pressure given easing reserve margins in the UK as plant returns to service and new plant comes on line," the broker said, adding: "At the same time, Drax noted in December that it has seen peak demand fall in the UK 5 per cent."

Elsewhere, Soco International rose to 1185p, up 2.16 per cent or 25p after UBS began covering the stock with a "buy" rating.

JKX Oil & Gas, on the other hand, fell to 235p, down almost 7 per cent or 17.5p after the broker moved its recommendation "neutral" from "buy"

Sports Direct International was 3.6 per cent or 2.25p down at 58.75p ahead of a third-quarter update, which is due tomorrow.

WH Smith gained 1.75p to 356.75p after Pali International said "buy", telling clients that given the value of the company's airport store business, it remained an attractive long-term merger target.

Carphone Warehouse was also up, gaining 1.5p to 108.5p despite the disclosure that non-executive chairman John Gildersleeve had sold 138,026 shares at 108.75p apiece for tax planning purposes

Among smaller companies, Frontier Mining surged to 0.75p, up 36.36 per cent or 0.2p after announcing new financing arrangements, saying that, subject to the requisite due diligence, it had signed heads of terms with a new lender to provide a $10m debt facility.

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