There’s no doubt about it, anyone invested in the mining sector has suffered for some time now. Commodity prices remain depressed and share prices are volatile. I prefer to stick to a basic thesis rather than trying to trade in the shares with CFDs (Contracts for Difference), or simply trying to sit tight on a share where there is considerable downward pressure and market negativity. In such a case, my thesis is this: I think things will get worse before they get better.
A look at the chart below tells the story – with my 20:20 hindsight, an open short position on any of these shares would have served me well. However with all of the market gyrations, I suspect that I could well have lost my shirt. Probably some traders have.
Annus horribilis
The Latin phrase meaning horrible year, famously used by Queen Elizabeth II in a speech in 1992, is apt. It’s certainly the case in terms of share price depreciation, but when share prices are depressed or falling, there’s usually at least one driver at work. Here though there are at least two, and a third that I feel has negatively impacted on both Glencore (LSE: GLEN) and Anglo American (LSE: AAL). Of course I’m talking about the dividend being cut. If the same happened over at BHP Billiton (LSE: BLT) I wouldn’t be surprised to see the share price slide more in line with its sector peers.
The other two drivers at work here are the huge amount of debt and depressed commodity prices. Both of these issues need to be worked through in order for the businesses to be able to return to full health.
A deep hole to dig out of
To be fair to the management teams at these mining giants, they have (perhaps belatedly) responded to the issues being faced by the businesses.
One of the worst fallers, Glencore, has addressed investor concerns regarding its debt pile by promising to divest certain assets, reduce capital expenditure, and slash its debt pile to $18bn-$19bn by the end of 2016.
Not to be outdone, Anglo American announced huge job cuts, promised to either divest or mothball unprofitable assets, and cancelled the dividend. While some may see this as a negative, I think it’s important to act now and suffer the short-term pain for a longer-term gain. By taking these steps now, the miner should be ready when prices pick up while others are still shrinking in size.
BHP Billiton, the most diversified of these three companies, is taking a slightly different tack: planning on increasing production of copper, but placing the focus on efficiency. It’s safe to say that I’m no expert in the extraction of commodities but I think that this will be a tall order. In my view the company needs to reduce its debt pile – the 11% dividend on offer here may well be a good place to start.
Will you grow richer in 2016?
To sum up, I believe the mining sector is best avoided for now. I’d like to see the sector reshape itself into a leaner operation, reduce debt and reduce the dividend payout to manageable levels. And while I wouldn’t rule out some consolidation down at these levels, I wouldn’t be investing for that reason alone – there are more attractive dividend opportunities elsewhere.
