The last few days of trading have been particularly difficult for investors with long positions in the mining sector. I warned earlier this year the shares of miners were meant to be a big disappointment in the second half of 2014. Do I think they have bottomed out?
Well, I do not fancy Rio Tinto (LSE: RIO) (NYSE: RIO.US) and BHP Billiton (LSE: BLT), but I’d add some exposure to Glencore (LSE: GLEN) and Anglo American (LSE: AAL) in 2015…
Rio & BHP: The Wrong Strategy At The Wrong Time
As you may know, Rio is my least favourite miner. Its stock is down 7% in the last five full days of trading, has lost 20% of value in 2014, and is about to test to its two-year lows. Rio Tinto’s plans appear to be on track, the bulls argue, but there’s little to like about its prospects, I say.
Disposals haven’t been quick enough to release shareholder value, and its iron ore strategy may easily backfire — the same applies to BHP, which is my second least favourite miner!
BHP stock is down 9.1% in the last five full days of trading, has lost 28% of value in 2014, and seems headed to its six-year lows of about 1,000p. BHP has been a massive disappointment in recent months: its management team have not been able to manage expectations, particularly with regard to cash returns, and BHP shareholders are paying a high price for that. The break-up of the group was a great opportunity to attract investors, but it turned out to be rather messy.
Commodity Cycle
The bulls would tell you that commodity prices may have bottomed out, so both Rio and BHP offer value as their equity valuations are depressed and both offer an enticing dividend yield.
Based on the economic landscape in China and other factors, I reckon the CRB Commodity Index — a commodity futures price index — could drop 10% or more in the first half of 2015, after a dreadful performance (-13%) in 2014. It trades around five-year lows.
So it looks like there could be tough times ahead for the miners…
The Prey and The Predator
Is there any safer bet out there in the mining sector, though?
Enter Glencore and Anglo American.
Glencore stock is down 8.6% in the last five days of trading, but has lost only 7% of value in 2014. It’s trading around its one-year low.
Glencore, which approached Rio earlier this year, plans to focus on cash returns to shareholders rather than splashing out on increasing output. That’s reasonable. Excess capital will be distributed via dividends, special dividends and stock buybacks. Glencore has a solid balance sheet, its valuation is appealing and management will soon execute a large deal, in my view.
The most obvious target is Rio — but how about Anglo? It is smaller than Rio and would be easier to digest.
Anglo stock is down 8.9% in the last five trading sessions, and has lost 12%% of value in 2014. Weakness in its share price, as well as size, make it a more appealing takeover candidate, although, as I have already argued, Anglo still needs to divest assets — and that’s easier said than done in a market where buyers dictate prices.
