Another day, another lousy piece of news from China. And in consequence, another stock market plunge, the FTSE 100 down more than 2.50% at time of writing. News that Chinese manufacturing PMI hit a three-year low in August has only confirmed all the worries of last week. We are witnessing the death of the commodity super-cycle in real time, with the big miners incidental victims.
Soul Mining
Anglo-American (LSE: AAL) is down 51% in the last year, Antofagasta Holdings (LSE: ANTO) is down 22% and Fresnillo (LSE: FRES) is down 31%. This is no short-term reversal, all stocks are down by even larger amounts over five years.
In one respect, investing in FTSE 100-listed mining stocks has become quite straightforward. It’s the Chinese economy, stupid. When China falls to earth, mining company stocks go underground. I don’t hold any of these four stocks but I did hold BHP Billiton, and sold it in short order when I saw the trend developing. I haven’t looked back since. Those analysts who thought mining giants could defy the demand slowdown by ramping up production have been proved expensively wrong, and I hope you didn’t listen to them.
Heavy Metal
So whether you invest in Anglo-American and Antofagasta will largely depend on how you call China. Personally, I don’t see a great demand recovery from that source. GDP growth is slowing, even by overstated official figures, and this looks set to continue as the authorities try to force a shift from export and infrastructure-led growth to consumption. The country needs to populate its ghost towns rather than spend money building more, which should spook mining investors.
Each stock has its own story to tell. Antofagasta, for example, has been hit as copper has taken a beating, falling from $3.1 to $2.3 per pound over the last year, a drop of more than 25%. First-half revenues were down 31%, as bad weather worsened matters by hitting shipments. Management claims it is well-equipped to survive the copper downswing, and is busying itself cutting $16m of costs, but what if the upswing doesn’t come? China still has a lot of work to do on its power infrastructure, which will eat copper, so maybe there is some hope.
Digging Deep
Dividend investors may be drawn to Anglo-American’s 8% yield, which management has so far defended despite falling profits, preferring to slash costs instead. With $13.5bn in debt, it has a lot of slashing to do, and that yield is definitely in doubt. And given my doubts about China, the stock is way too contrarian from my tastes.
At least there is a meaty dividend to cut, which is more than you can say about Mexico-focused miner Fresnillo, which currently yields a meagre 0.33%. With its focus on precious metal silver and gold, this is a different beast to the other miners mentioned here, with China less of an issue. First-half production was up sharply, but it has been hit by a sharp drop in the silver price, down 24% of the year, and to a lesser extent gold, down 12%. The recent gold rebound may encourage some investors, but I would have expected it to rise higher last week’s turmoil. If you are bullish on these two metals, today’s low price could be a good entry point.
Maybe you believe returning Chinese appetite for commodities will save the day, but I certainly don’t.
