Big mining looks attractive as part of a diversified long-term portfolio.
In my last article I said I wouldn't bet the farm on the future occurrence of a commodity super-cycle, but I do think big mining looks attractive as part of a diversified long-term portfolio.
Since I am looking for investments to tuck away in my SIPP, it seems like a good idea to consider the 8 FTSE 100 miners as potential investments.
How they compare
This table lists them in order of market capitalisation and considers the valuation measures of historic and forward price to earnings ratios:
| Mkt
Cap £m | Share
price £ | Historic
PER | Forward
PER 07 | Forward
PER 08 |
|---|
| Anglo American Mining
(LSE: AAL)
| 42,521 | 28.74 | 16 | 13 | 15 |
| Rio Tinto
(LSE: RIO)
| 35,364 | 35.77 | 12.7 | 12.4 | 12.3 |
| BHP Billiton
(LSE: BLT)
| 27,845 | 11.99 | 14 | 10.4 | 10.3 |
| Xstrata
(LSE: XTA)
| 26,400 | 27.17 | 12.4 | 9.5 | 12 |
| Lonmin
(LSE: LMI)
| 5868 | 37.90 | 24 | 18 | 16.2 |
| Kazakhmys
(LSE: KAZ)
| 5441 | 11.64 | 7.7 | 8 | 8.6 |
| Antofagasta
(LSE: ANTO)
| 5289 | 5.36 | 7.7 | 9.4 | 11 |
| Vedanta Resources
(LSE: VED)
| 3930 | 13.67 | 21 | 8 | 7.7 |
The first thing I notice is that they neatly divide into a relatively big four (AAL, RIO, BLT and XTA) and a relatively small four (LMI, KAZ, ANTO and VED) in terms of their market capitalisation.
A quick skim over the most recent results of each company, confirms that each seems to be generating robust cash flow, and debt seems under control in most cases. However, none of these companies is paying a high dividend yield so investors will be looking for capital growth. The price to earnings ratio figures provide a reasonable starting point for further research.
What each company gives us
As we are coming at this from a desire to invest in commodities, it is important to know what each company deals with. Unsurprisingly the big four companies are the most diversified, covering most metals and industrial minerals between them. There are subtle differences between them, but copper, iron ore coal and nickel contributes heavily in all of their profits. BHP Billiton stands out slightly with nearly 18% of its profits derived from oil and gas, but overall there isn't much between them in my view, so selection comes down to valuation.
With the small four, it is different: Lonmin is mainly a play on platinum group metals; Kazakhmys is mainly copper with some zinc, gold and silver; Antofagasta is copper and Vedanta is the most diversified producing mainly aluminium, copper and zinc with some lead and gold too.
Where they operate
Political risk is worth considering, as some 'holes in the ground' can be located in far-flung places. However, the big four have minimal geographic risk because of diversification. They all have operations covering most continents although none is digging in Antarctica as far as I am aware!
With the small four, it is again different: Lonmin operates in South Africa; Kazakhmys operates in Kazakhstan; Antofagasta is based in Chile, and Vedanta mainly operates in India.
In Conclusion
Judging by the consensus forward price to earnings ratios, analysts are not forecasting these companies profits to shoot the lights out over the next year or two. In fact the shares have nearly all had a good run over the last few weeks. Nevertheless, over a long-term horizon I think that there is a place for a couple of them in my SIPP portfolio.
My strategy is to go for one of the big four in order to benefit from its diversification and for one of the small four in the hope that it will grow up to be one of the big companies! I have ruled out Lonmin, Kazakhmys and Antofagasta because I do not want to put all my eggs into one country or one commodity.
Of all of the companies, I have selected BHP Billiton and Vedanta Resources as my two candidates for further research.
