“If you think that the shares of miners have peaked, you may well be right,” I wrote on 19 August.
Rio Tinto (LSE: RIO) stock is down 5.8% since, while the shares of Anglo American (LSE: AAL) (-5.5%) and BHP Billiton (LSE: BLT) (-5.3%) haven’t fared much better. Is Glencore (LSE: GLEN) stock (+0.3%) a safer bet?
Well, perhaps.
Of course, opportunistic investors may find a compelling reason to buy on weakness right now. What is certain, however, is that it takes a lot of courage to invest in some of the major players in the mining sector in this market environment. It’s not that miners are doomed; it’s just a bad time to invest in their shares as a sluggish business cycle is unlikely to provide a helping hand.
In this context, I still prefer Anglo to Rio and BHP, although Glencore is also drawing my attention.
Rio & BHP: Cash Returns Needed
With miners, divestments and cash returns to shareholders will make the difference in months ahead. BHP has done only half of the job so far, having announced that it would spin off most of the assets it consolidated at the time it merged with Billiton more than a decade ago. Still, investors sold the stock en masse last month as BHP failed to announce a stock buyback of up to $5bn.
Rio is one of the top picks at Royal Bank of Canada. The broker, one of the leading houses in the commodity space, recently argued that Rio is attractive, and the shares could offer upside because the miner, just like Glencore, has “demonstrated a ruthless focus on opex and capex reduction into 2015 that exceeds that of other miners”. Moreover, Rio will focus on working capital in second half of 2014, which is a very good thing, the analysts noted. They have a price target of £37, for an implied 15.6% upside.
Rio may become a more efficient machine, but it needs something very different to deliver long-term value. It must shrink. As recent trends show, the problem is that nobody knows what’s around the corner in terms of global demand and supply for commodities, and Rio has been way too slow to address its portfolio of assets so far. If a worst-case scenario plays out in China, Rio stock will be hammered and will underperform the sector, in my view.
Management should demonstrate a ruthless focus to trim their portfolio of assets, where returns associated to iron ore and aluminium assets may become more volatile. Value investors shouldn’t back Rio in its current form in the next year or so.
Anglo & Glencore: Do They Belong To Each Other?
Investors have supported Anglo management’s decision to undertake a comprehensive portfolio reshuffle, but as I noted in previous articles, Anglo won’t find it easy to find buyers willing to pay top dollar for its assets. Anglo stock isn’t expensive, but its main – only? — attraction is that Anglo remains the most appealing takeover target in the mining sector. In this context, Glencore springs to mind as a likely acquire. Whether Glencore makes a move or not, investors might want to hold its stock in a diversified portfolio.
Well, perhaps…
