A storm is brewing… is it time to sell Rio Tinto plc, Anglo American plc and Glencore plc?

Should you sell Rio Tinto plc (LON: RIO), Anglo American plc (LON: AAL) and Glencore plc (LON: GLEN)?

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2015 was a bad year for the commodity industry, and 2016 could be a lot worse. After a buoyant start to the year, which was largely a result of Chinese speculation, the industry has now been lulled into a false sense of security as commodity prices have recovered from their 2015 lows.

There’s likely to be more pain on the horizon for miners this year. Many commodity markets remained oversupplied, and the sudden spike in prices at the beginning of the year has helped many smaller producers stay in business despite the turbulent market conditions – bad news for supply/demand fundamentals.

Stay away

Shares in Rio Tinto (LSE: RIO), Anglo American (LSE: AAL) and Glencore (LSE: GLEN) all followed the commodity markets higher during the first quarter of 2016. But now the rally is starting to run out of steam and it could be time for investors to turn their backs on the sector before the storm returns.

To-date, shares in Anglo have surprised even the most optimistic City forecasts by surging as much as 150% during April. The company’s shares have since paired their gains but are still up around 100% year-to-date. However, these gains have come without any noticeable improvement in fundamentals on Anglo’s part. Moreover, the company’s shares currently trade at a forward PE of 21.3 and after last year’s dividend cut could only support a dividend yield of 0.1%.

Highly leveraged 

Glencore has outperformed the wider market by 43.5% year-to-date and the market seems to be willing to trust the company once again. But Glencore remains highly leveraged and highly exposed to volatile commodity prices.

It won’t take much for Glencore’s stock to erase all of their year-to-date gains if commodity prices suddenly take another step lower.

Once again, Glencore is relatively expensive trading at a forward P/E 39.6 and the company’s shares offer a token dividend yield of 0.2%. City analysts expect Glencore to report earnings per share of 3.9p for 2016 and earnings growth of 45% is pencilled in for 2017. According to current forecasts, Glencore is set to earn 5.7p for 2017.­­

Shares subdued

Rio’s shares have been some of the most subdued in the mining sector so far this year. Year-to-date, Rio shares are up only 0.1%, underperforming the FTSE 100 by 0.2% excluding dividends.

As Rio’s gains haven’t been as erratic as those of Anglo and Glencore, the company’s shares looked to be more in defensive mode within the commodity sector than its highly-geared peers. It certainly looks as if the market is treating Rio as slow-and-study income play rather than a geared bet on rising commodity prices.

Shares in Rio currently trade at a forward PE of 17.3 and support a dividend yield of 4.1%. City analysts expect the company’s earnings per share to fall by 35% this year, before rebounding by 12% to 125.1p for 2017.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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