The shares of miners Rio Tinto (LSE: RIO), Anglo American (LSE: AAL) and Antofagasta (LSE: ANTO) all made post-financial-crisis highs in 2011: over £46, £34 and £16, respectively.
Today, they’re all making new lows. Rio Tinto has touched £21, Anglo American £5.61 and Antofagasta £4.82.
Slowing growth in China looms large in the background, and sentiment is firmly against these companies. We have that peculiar irony that afflicts the stock market from time to time: investors couldn’t get enough of miners when their share prices were sky high; now that they’ve crashed to multi-year lows nobody wants them.
Of course, the shares could go lower still in the short term, but I believe that, from current levels, long-term investors will make more than satisfactory returns in the decades ahead.
Rio Tinto
Iron ore goliath Rio Tinto is a super-efficient producer. At times like the present, when metals prices are in a slump, being a low-cost operator is the key to survivability. Companies such as Rio can afford to increase volumes, while producers with higher costs get driven out of the market. Sooner or later, supply and demand will swing again — in favour of rising metals prices.
Rio’s profits aren’t expected to rise any time soon. Nevertheless, the company’s focus on financial and operating discipline is enabling it to pay dividends and to continue investing for future growth. Post-tax operating cash flows of $4.4bn in the first half of this year more than covered sustaining capex of $1.2bn and dividend payments of $2.2bn.
At the moment a prospective 7% dividend yield looks secure, and analysts are actually forecasting a modest 3% rise in the payout next year — attractive compensation for patient long-term investors.
Anglo American
Anglo American is more diversified than Rio Tinto, although that hasn’t really helped against the fall in prices across the board. The company’s balance sheet is not as strong as Rio’s, but management have been taking steps to bolster it by asset sales, as well as Improving operational performance, and accelerating cost and capex reductions.
Seeing companies sell assets in the trough of the cycle isn’t particularly heartwarming; but needs must, and focusing the portfolio around those assets that are of a scale and quality to generate the strongest return makes sense. Chief executive Mark Cutifani, who joined the company in 2013, appears to be doing a good job of creating a sustainable business in what has been a challenging backdrop for doing so.
Anglo American maintained its latest interim dividend, but the balance of analysts is not optimistic for the future, the consensus being for a cut in the payout this year or next. However, the share price is so depressed that slashing the dividend in half would still give a yield of 5%.
Antofagasta
Chilean copper miner Antofagasta sold its water business during the summer for a bit under $1bn. It was not a forced sale demanded by a weak balance sheet, but a strategic move to focus on the core business. Indeed, the company has since invested $1bn to acquire a 50% stake in a copper mine from Barrick Gold. Antofagasta said: “This was a rare opportunity to acquire a good-quality copper asset, and we took it”.
You have to admire a company in a cyclical industry that has positioned itself to be able to buy earnings and cash flow accretive assets at the bottom of the cycle. I’d suggest this is probably a result of the long-term family control of Antofagasta and the conservative stewardship that comes with it. Prudence is also evident in a small maintenance dividend, with bonanza special payouts in the boom times.
