BHP Billiton and Rio Tinto are now two of the cheapest companies in the FTSE 100.
One sector that I've been reluctant to invest in over the last few years is big miners -- giants like BHP Billiton (LSE: BLT), Rio Tinto (LSE: RIO) and Anglo American (LSE: AAL).
These behemoths of the resource industry have been supremely profitable but a little expensive for my taste, thanks to booming global demand for their commodities. However, slowing growth in China means that is all starting to change, and these shares are starting to show me two key buying signals.
Let me explain.
Thanks, China
China's growth rate has slowed slightly this year, causing widespread falls in the share prices of the world's biggest mining companies. Despite this, China's GDP is still expected to grow by about 7% this year -- and from a much larger base than in previous years.
This means that global demand for commodities like coal and iron ore will remain strong, but it does mean that the commodities industry is likely to move from flat-out expansion into a more mature, 'cash cow' phase.
The big miners seem to have anticipated this quite sensibly, with Rio and BHP both announcing scaled-back, more focused investment plans over the last few months.
I reckon this is good news, and will give investors who didn't get on board before the commodities boom got started a second chance to gain access to these companies' earnings at an attractive price.
Covet thy earnings
Earlier this year, the world's third-richest man, Warren Buffett, ignored market sentiment and increased his holding in one of the UK's biggest companies to more than 5%.
Buffett did this because he thought it looked cheap and he wanted greater access to its strong, long-term earnings (you can find out the name of the company Buffett bought and the price he paid in this free Fool report).
Buffett's logic is the reason I am currently so attracted to big mining shares; access to cheap, long-term earnings.
In 2011, BHP Billiton made operating profits of £19bn on turnover of £44bn. Most of the big mining projects BHP and its peers undertake have lifespans measured in decades, virtually guaranteeing a strong, reliable stream of earnings.
As the table below shows, access to mining companies' earnings has got a lot cheaper over the last year, falling much further than the FTSE 100 (UKX). This mouth-watering cheapness is my first buying signal:
| Company | Price-to-earnings ratio | 12-month change |
|---|
| BHP Billiton | 7.1 | -23% |
| Anglo American | 6.6 | -27% |
| Rio Tinto | 5.5 | -31% |
| FTSE 100 | 14.2 | -5.5% |
Source: Digital Look, Yahoo! Finance
Here come the dividends!
My second buying signal is income. BHP, Rio and Anglo American are all expected to start paying out a greater share of their earnings in dividends over the next few years. As the table below shows, they all have a much higher level of dividend cover than the FTSE 100 average, and can easily afford to give shareholders a pay rise:
| Company | Yield | Dividend cover |
|---|
| BHP Billiton | 3.63% | 3.9 |
| Rio Tinto | 3.25% | 5.6 |
| Anglo American | 2.23% | 6.8 |
| FTSE 100 | 3.8% | 2.85 |
Source: Digital Look
These figures suggest to me that a 4%+ yield will soon be within the reach of shareholders in BHP and Rio, taking their yields above the average for the FTSE 100; one of my criteria for buying.
Indeed, as I write, BHP offers a 4.1% yield based on its current share price and forecast total dividend for the current financial year.
Ready to buy?
Shares in Rio and Anglo American have now fallen to 2006 levels and, while BHP remains a little more expensive, I believe that all three now offer very good value.
My choice will be BHP or Rio, probably the latter, but I've got a feeling they might all be cheaper still later this year, so I'm going to keep my powder dry for a little longer yet.
In the meantime, you might be interested to know that the Fool's own team of analysts have also singled out the mining sector as one of the best places to invest in 2012. You can find out which mining shares they are tipping in this free report, "Top Sectors Of 2012", which I highly recommend.
Where is the UK's leading dividend stock-picker investing today? The identities of Neil Woodford's favourite blue chips are revealed in this free Motley Fool report -- "8 Shares Held By Britain's Super Investor".
Further investment opportunities:
> Roland does not own any of the shares mentioned in this article.
