Mining stocks were excellent buys at the start of the pandemic. In fact, due to the rising prices of commodities, such as iron ore, gold and copper, many miners posted record half-year earnings. Shareholders in many mining stocks were also rewarded with special dividends and share buyback programmes. But the past few weeks have been far less pretty. This is because as the prices of many of these commodities have fallen, so have the share prices of these companies. In fact, Anglo American (LSE: AAL) has fallen 31% since its highs in August, while Rio Tinto (LSE: RIO) has fallen 28%. So, should I be buying these stocks or is there further to fall?
Both Anglo American and Rio Tinto issued excellent half-year trading updates. In fact, AAL reported profits of over $5bn, a 1,000% increase on the same period last year. RIO also excelled, with earnings exceeding $12bn, a 271% increase on last year.
In line with these results, both companies were also able to drastically increase shareholder returns. RIO announced cash returns of $9.1bn, through both an ordinary dividend of 376 cents per share (a 143% increase on last year) and a special dividend of 185 cents per share. Even excluding the special dividends, this still gives RIO a current dividend yield of over 10%.
AAL announced an interim dividend per share of $1.71, compared to just 28 cents last year, alongside a special dividend of 80 cents per share and a $1bn share buyback programme. Excluding specials, this gives AAL a yield of nearly 8%.
For income investors, these mining stocks therefore look extremely appealing. The excellent results also demonstrate how well they have performed over the past year.
So, why have they fallen?
After such incredible results, it seems bizarre that these mining stocks have fallen so significant. But these results were primarily due to the rising prices of commodities, which are now in freefall. For example, iron ore, where AAL and RIO both generate most of their profits, has collapsed to below $100, from over $200 a few months ago. This is due to the slowing down of the construction industry in China, alongside its slowing economy. Other commodities like copper have also seen weakness recently.
The effects of this are devastating for mining stocks. This is because it’s now expected that they will report significantly lower profits for the rest of the year. As a result, similar shareholder returns to what were announced in the first half of the year seem extremely unlikely.
What am I doing with these mining stocks?
Due to the strength shown in the first half of the year, it is very tempting to buy both AAL and RIO. Indeed, using these results, RIO trades on a current price-to-earnings ratio of just 4, and AAL trades on an even lower P/E ratio of 3.8. This indicates extremely cheap valuations. But unfortunately, I feel that these results were a one-off, and there may be further to fall. As such, I’m leaving both these mining stocks on the sidelines for now.
Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.