What on earth do you make of mining stocks? Ignore those people who say small companies are more volatile — nothing is more wayward than the commodity sector. One day big-name FTSE 100 companies worth tens of billions are shooting up 5%, the next they are crashing 10%. 

Swing low, swing high

And over the course of a year, commodity stocks can be even more wayward. Anglo American, for example, shed three-quarters of its value in 2015, only to recoup a massive chunk of those losses in recent months. It never seems to stop.

Last week I was warning that the great 2016 commodity stock revival had run out of steam, but the very next day the industrial metals and mining sector leapt more than 6%. They really are bellwether stocks for global growth expectations and, as you can see, those expectations are all over the place.

Mining giants BHP Billiton (LSE: BLT) and Glencore (LSE: GLEN) are poster boys for mining stock volatility. Despite rising 16% and 74%, respectively, over the past six months, their share prices are still 36% and 48 % lower than they were 12 months ago. You could have made or lost a fortune on either stock over the last year, purely depending on when you put down your money.

A sentimental affair

So will the volatility continue? Absolutely.

The main factor driving their share prices is sentiment. Good news from China (an increasingly rare event) and up their share prices go, on hopes that demand from their biggest customer will hold firm. Bad news from the US (an increasingly common event) and — perversely — up their share prices go again, as it means the Federal Reserve is likely to keep interest rates lower for longer.

Bad news from China, Brexit fears, Eurozone worries, signs of slowing global growth or any other piece of news that dampens sentiment, and down their share prices tumble. Sometimes it seems that business fundamentals hardly come into it at all.

Fundamental fun

It would be far nicer if we could pore over company balance sheets to work out where we think the share price will go next. At some point, fundamentals such as revenues, debts, earnings per share, costs and cash flows deserve to take centre stage.

On that front, both BHP Billiton and Glencore have worked hard to sharpen up their act in recent months. Despite falling metal prices and significant dividend payments, BHP Billiton has maintained its strong balance sheet, with net debt creeping up by just $1.5bn to $25.9bn in 2015. Cutting capex, slashing dividend payouts and controlling operational costs have left it in reasonable shape to withstand the “lower prices for longer” scenario it anticipates. Credit Suisse recently noted that BHP Billiton is well funded, and should have $7bn-plus of free cashflow for the year to June 2017.

Metal men

Management at Glencore has been similarly hard at work, selling off large stakes in its agricultural business in a bid to slim the business and knock a few billion off its debts, and cutting copper, zinc, lead, oil and coal production in response to the current market downturn. It is easy to forget just how bad things looked for the business at the end of last year.

In the end, both businesses rely on one thing to grow: higher commodity prices. Given today’s uncertain global economic outlook, the volatility looks set to continue for the foreseeable.

Buy on the dips, not the peaks.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.