The FTSE 100‘s mining companies have been pummeled by tumbling prices of metals and minerals, largely due to a combination of over-supply and a softening of Chinese demand as that country’s economic growth has started to slow.
But if you look at how the price of iron ore has been going since the start of the year, you’ll see what looks like the start of a recovery. The same is true of copper, aluminium, coal, and all varieties of valuable dirt… including, of course, oil.
And that’s reflected in the prices of shares in the mining sector. A lot of them hit bottom on 20 January, and at that date BHP Billiton (LSE: BLT) had fallen by 70% since its pre-crash high in July 2014. So what chance is there of the shares doubling from that low? Well, we’ve already seen a 43% recovery to 838p as I write.
Profit-wise this is still going to be a tough year, and at interim-reporting time in February the company cut its dividend saying “we now believe the period of weaker prices and higher volatility will be prolonged“. The year to June 2017 is forecast to being some respite with a return to rising earnings, although with big one-off charges in the current year we’ll really need to see what the prognosis for the following year looks like.
Should the current commodities recovery continue, I can see BHP’s prospects being uprated — and I think the possibility of a doubling in the share price over the next couple of years is a definite possibility. BHP directors seem to share my optimism too, with a number of them buying up shares over the past week or so.
Top pick?
Glencore (LSE: GLEN) shares crashed by 80% over the same period between July 2014 and the crunch day of 20 January this year, but since then we’ve seen a much bigger recovery than at BHP, with a gain of 125% to 160p.
Glencore was one of the hardest hit by commodity falls because of the huge debt it had been carrying, but its aggressive debt-reduction programme has improved confidence in the company — for the year ended December 2015, net debt was cut by 15%, with new capital having been raised in September through a $2.5bn share placing.
The City’s tipsters like Glencore too, putting out a pretty firm ‘buy’ consensus. The latest sentiment seems rosier than it has been for some time, and things really could go bad again if the commodity recovery should start to slip or if oil prices could falter again. But I don’t see Glencore’s strength as being short term. I see a recovery in prices inevitable in the longer term, and right now Glencore could be my pick of the sector — and I wouldn’t be surprised to see a further doubling of the price and more over the next few years.
Too risky
The fall and rise of Anglo American (LSE: AAL) has been the most spectacular of the three, with an 87% fall over the same period to 20 January being followed by a 151% rebound to 555p. The trouble is, Anglo American’s problems have not been restricted to falling mineral prices as the company has suffered with employment problems in South Africa — and we’ve recently heard of multi-million dollar settlements over dust-related lung diseases contracted by a number of its South African employees.
The year ended December 2015 saw no change in net debt since the previous year, at $12.9bn, and that’s a company with a market cap of only around $11bn (£7.8bn). Analysts are still very bearish on Anglo American with a strong ‘sell’ stance, and I’m with them — this is not the miner I’d pick for a commodities recovery.
