Commodity stocks are dropping out of the FTSE 100 like stones.
An incredible 14 commodity stocks have crashed out since 2012, according to new research from AJ Bell. Notable casualties include Amec, Cairn Energy, Evraz, Kazakhmys, Lonmin, Petrofac, Tullow Oil and Weir.
BP, Royal Dutch Shell, BHP Billiton and Rio Tinto remain, but assuming Shell completes its acquisition of BG Group, only five other commodity stocks survive. AJ Bell suggests that when a hot sector falls out of favour it can take a years to restore its fortunes. Should you dive into the final five?
Anglo-American
I exited my commodity holdings a couple of years ago and that turned out to be a prescient decision. Just look at the fate of Anglo-American (LSE: AAL) — down 52% over 12 months and 75% over five years. It now yields a horribly distorted 8%, the second-highest on the FTSE 100.
Those dividends cost Anglo-American £1bn a year and expectations of the first cut since 2009 are becoming entrenched. It has made $1.9bn from asset sales this year, including the recent sale of Anglo-American Norte SA, but it may have to bite the dividend bullet soon. If you foresee a commodity price rebound this would be a good way to play it, but with China still slowing, I remain pessimistic.
Antofagasta
Perhaps the biggest surprise about Antofagasta (LSE: ANTO) is that it still trades at a relatively pricey 18 times earnings and yields just 2.40%. It is down to 25% in the last year following a 31% drop in half-year group revenues due to bad weather and the falling copper price.
Cost savings and disposals are the order of the day, but management is putting too much faith in a Chinese recovery for my liking. This is a cyclical sector but it seems too soon to call the upswing. If I were buying commodities today, I would seek something cheaper.
Fresnillo
Mexico-based gold and silver miner Fresnillo (LSE: FRES) could not escape the misery either, falling 23% over one year and 50% over five. While it has been ramping up production, first-half profits were still hit by falling precious metal prices, down 44% to $76m. If today’s turbulence has done little to revive precious metal prices, I can’t see any great reason to buy the stock today.
Glencore
Troubled miner Glencore (LSE: GLEN) boasts the biggest yield on the FTSE 100 at 9.44% but don’t put too much faith in that as the company has just suspended its final 2015 dividend. Contrarians may be tempted by the 66% fall in its share price this year, while sober souls will be scared away by its estimated $30bn of debt.
Glencore has been hammered by falling copper, oil and zinc prices, and the dividend suspension and recent controversial issue of $2.5bn of shares has further dented its appeal. Management hubris and murky trading operations seem a bad combination to me.
Randgold Resources
The gold price is down around 11% over the past five years and gold miner Randgold Resources (LON: RRS) more than reflects that with a 40% drop in its share price. Even Black Monday couldn’t revive gold, but at least Randgold is bucking the downwards commodity trend by actually raising profits, up 15% in the second quarter.
Gold bugs might be tempted by Randgold’s strong balance sheet, with $109m in cash and no debt. Its business model is based on gold at $1,000 an ounce, against today’s price of $1,330. But with Federal Reserve hawks now hinting at a rate rise this year, gold could lose even more of its shine.
