The first thing I learned about commodity stocks is that they can be volatile and cyclical, but lately things have been getting ridiculous. Mining giants Anglo American (LSE: AAL) and Glencore (LSE: GLEN) were the worst two performers on the FTSE 100 last year, but this year the wheel of fortune has swung back in their favour, and both are right at the top of the charts.
Gold Mining
Anglo American was the best performing stock in the first quarter of 2016 with a total return of 84.4%, closely followed by Glencore at 73.9%, according to Hargreaves Landsdown. They have streaked far ahead of the competition, with Randgold Resources in third place posting growth of “only” 54.8%, with yet another miner Fresnillo in fourth place up a relatively paltry 34.5%.
Last year’s mining stock wipe-out didn’t surprise me. I had already sold out of the sector, correctly judging that slowing Chinese growth must punish commodity stocks, but I didn’t see this year’s rebound coming. Perhaps I should have done, as valuations on both stocks had collapsed to levels that no self-respecting contrarian investor could ignore.
The belated decision to dump dividend payouts may have done both stocks a favour, by getting the bad news out of the way. Macro factors also drove the share price recovery, notably the weakening greenback as the doves flew at the Fed, making dollar-priced commodities cheaper for the rest of the world. Chinese stimulus may also have leaked into the natural resources sector.
Dumping Ground
Management at Anglo American and Glencore also deserve some credit for the fightback, making serious efforts to cut spending, dispose of non-core assets, refinance borrowings and reduce their teetering debt piles.
Anglo American’s sale of its 70% stake in Australian coal mine Foxleigh is only likely to make a tiny dent in its $10bn of debt. It is targeting another $3bn to $4bn of sales, which will prove more challenging given today’s depressed climate. With earnings per share (EPS) forecast to fall by 47% this year it is hard to see how Anglo American sustain its rapid pace of recovery but I could be wrong: the stock is up another 9% in the past week.
Til Debt Do We Part
Glencore has been running its own garage sale, offloading 40% of its agriculture commodities business to the Canada Pension Plan Investment Board for a more sizeable $2.5bn, possibly with another 20% to follow. Again, the money will go to pay down debt, which topped a frightening $30 billion last year, but given a fair wind that could fall to $20 billion by the end of 2016.
There may be brighter days ahead, with Anglo American’s EPS forecast to grow 71% in 2017, more than matched by Glencore’s predicted 85%. But with Chinese exports dropping 25% in February, and GDP growth in the world’s second-biggest economy hitting its lowest level in a quarter of a century, I remain sceptical. The contrarian buying opportunity has almost certainly passed.
