What I’d do about the Rio Tinto and Fresnillo share prices today

Rio Tinto (LON: RIO) shares have been climbing ahead of most sector rivals, while Antofagasta and Fresnillo report satisfying production levels.

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Overlooked by the headlines, some share prices in the mining sector have been creeping up. Over the past five years, while the FTSE 100 has gained a modest 10%, Rio Tinto (LSE: RIO) shares are up 37%. And while dividends can be erratic due to the cyclical nature of the sector, Rio’s have been climbing strongly and forecasts suggest a yield of 8.6% for the current year.

That’s way better than the predicted overall Footsie yield of 4.8%, but a lot of that will be due to the shares’ low forward P/E rating of just eight after the price has fallen back a little in recent months.

The downwards pressure is coming from fears over falling demand as global economic weakness could well hurt the commodities market in 2020 and beyond. China, in particular, has reported a slowing of economic growth to 6% in the three months to 30 September, from 6.2%

But a growth rate of 6% is something many a developed economy can only dream of. And the fact Chinese growth has been slowing for a couple of decades is only to be expected as that country matures further. It seems like only yesterday I was reading about Chinese growth dropping below 9% amid fears of a ‘hard landing’ for its economy — which still hasn’t happened.

Copper bottomed

Any downturn in China might be expected to affect Antofagasta (LSE: ANTO) too. But its focus on copper has helped keep its share valuation buoyant and we’re looking at a forward P/E of 19 (and a modest dividend yield of 2.5%).

The company’s Q3 production report Wednesday was opened by CEO Iván Arriagada, who spoke of “another quarter of strong production underpinned by a consistent operating performance, which together with higher grades at some of our operations, contributed to year to date copper volumes of 584,200 tonnes which are 16% higher than the same period in 2018.”

Production costs are falling, and the firm expects full-year production growth in line with previous guidance.

The fact that the firm also produces gold can’t have hurt, as Brexit-scared investors are helping to push up the price of that otherwise essentially useless shiny stuff. Antofagasta produced 226,600 ounces of gold year-to-date, up 88.7% on the previous year.

Silver plated

Meanwhile, at silver producer Fresnillo (LSE: FRES), CEO Octavio Alvídrez spoke of the company’s Q3 production, saying: “While grades remain variable, we are now processing higher volumes of ore on a more consistent basis.”

Year-to-date total silver production actually declined 11.8%, at 40,839 koz, with gold down 7% at 642,169 oz — but that’s still a lot of ounces of both. The period was affected by “taking actions to address maintenance performance, contractor productivity and equipment availability.” Work currently being undertaken should hopefully help stabilise grades and boost overall volumes.

After a huge surge in 2016, the Fresnillo share price has since been steadily declining, and has lost two thirds of its value since an August peak that year. But even after that, forecasts still put the shares on a forward P/E multiple of 31 for the full year. A 29% earnings rise indicated for 2020 would drop that, but only as far as 25, and dividends are set to yield only around 2%.

I think mining shares are great for long-term, if variable, income, but I’d buy on the down cycle.

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 considered so you should consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Fresnillo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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