“Be fearful when others are greedy, and be greedy when others are fearful” is what Warren Buffett said back in 2008. It seems obvious, but it can be a surprisingly hard rule to follow — do you have the nerves it takes to be buying when all the so-called experts are selling?
I reckon the mining sector right now is perhaps exactly the kind of thing Mr Buffett was thinking of when he said those words. It’s a cyclical sector at the best of times, and its downswing has been exacerbated by the fears of a Chinese economic slowdown which have led to falling metals and minerals prices.
But the annual rate of growth in China has slipped to only about 7.4%, which must make the eurozone green with envy, and our big miners are still shipping all they can dig up — and at today’s depressed share prices, they’re offering some very nice dividend yields.
Record production
Look at BHP Billiton (LSE: BLT)(NYSE: BBL.US), whose first-half operational update told us of a 9% overall rise in production, with metallurgical coal production up 21% and iron ore from Western Australia up 15%, both achieving new records. CEO Andrew Mackenzie said “Our operational performance over the last six months has been strong. We are reducing costs and improving both operating and capital productivity across the Group faster than originally planned“, telling us he sees opportunities for increases to cash flow.
Forecasts suggest a 5.5% dividend yield this year from a share on a P/E of 15 on today’s price of 1,548p, rising to 5.9% next year. Dividend cover will be a bit squeezed, but should be fine if you don’t buy into the pessimism.
Then there’s Rio Tinto (LSE: RIO)(NYSE: RIO.US), whose 2014 results we are still awaiting — they’re due on 12 February. Based on a forecast 16% drop in EPS, we’re looking at a P/E of under 10 on today’s 3,035p share price. And that’s with a predicted 4.7% dividend yield, with forecasts of 5.2% and 5.6% pencilled in for the next two years. Rio Tinto’s predicted dividend yields are still well covered by earnings, even in these allegedly tough times.
Oh, and in the fourth quarter, growth in iron ore shipments once again exceeded production — shipments up 17% with production up 11%.
Well-covered dividends
But what about Glencore (LSE: GLEN), the FTSE’s biggest mining and commodities company? The share price has slumped in recent months, to 265p, but this is a stock on a forward P/E of under 13 for December 2015, dropping to only 8.5 on 2016 forecasts. Sure, two years out is largely guesswork right now, but the City is expecting a dividend yield of 4.8% in 2015 followed by 5.5% in 2016, around twice covered by earnings.
Results for 2014 are due on 3 March, and I don’t expect them to disappoint.
