Value stocks are ones that don’t accurately reflect the true worth of the companies concerned. I wonder if miners meet this definition.
The FTSE 100‘s six mining stocks have all fallen over the past six months. However, some have fared better than others.
Anglo American‘s share price is down 37% since February 2023, whereas Endeavour Mining‘s has fallen by ‘only’ 8%.
Uncertain outlook
Metals prices have softened recently, largely due to concerns about the strength of the economic recovery in China and the possible impact on demand. With the country consuming more than 50% of global industrial metals and steel production, this isn’t surprising.
Mining stocks are also permanently out of favour with ethical investors. Extracting metals inevitably causes environmental damage although those responsible would argue they are meeting an essential need.
And volatile commodity prices means earnings are unpredictable.
A good example of this came on 26 July 2023 when Rio Tinto released its results for the first half of 2023. Compared to the same period in 2022, profit after tax was down 43% and free cash flow fell 47%. This resulted in the dividend being cut from $2.67 to $1.77 a share.
Key differences
But it’s important to remember that not all mining companies are the same.
Each produces different types of metals in varying amounts.
Nearly 80% of Antofagasta‘s revenue comes from copper. Fresnillo‘s sales are derived mainly from gold and silver (combined 85%).
This distinction is important because commodity prices don’t move in unison. Over the past six months, gold prices are up whereas copper has fallen.
The scale of their operations is also very different.
Glencore recorded revenue of $256bn in 2023 and has a market cap of £52bn — 13 times’ that of Fresnillo. Bigger companies are more likely to cope better with economic shocks.
And because they are all so different it’s not possible to adopt a ‘one size fits all’ approach when looking at valuations.
Some numbers
Glencore, Rio Tinto, and Anglo American currently have price-to-earnings (P/E) ratios of between seven and nine. This implies better value that the FTSE 100 as a whole.
But the ratios of most banking stocks are lower. BP and Shell have similar valuations.
| Stock | Forward P/E ratio |
| Barclays | 4.4 |
| NatWest | 5.2 |
| Lloyds Banking Group | 5.6 |
| HSBC | 6.3 |
| BP | 7.0 |
| Glencore | 7.1 |
| Shell | 7.6 |
| Rio Tinto | 8.1 |
| Anglo American | 8.9 |
| Endeavour Mining | 17.4 |
| Antofagasta | 24.2 |
| Fresnillo | 25.3 |
I’m also cautious about choosing mining shares on the basis of their dividend yields. Fluctuating earnings can mean erratic returns to shareholders.
But the yields on some mining stocks are among the highest in the FTSE 100.
AJ Bell is currently forecasting a yield of 10.7% for Glencore in 2023.
Final thoughts
I already have exposure to the industry through my shareholding in Anglo American.
I bought the stock in 2022 and currently have an unrealised loss. But I haven’t lost faith in the company, or the sector in general.
I still think the shares represent good value and, over the long term, will deliver above-average returns. The move to net zero means the demand for metals will increase. Electric car batteries and renewable energy assets are all metal intensive.
There’s also the prospect of picking up some reasonable dividends along the way, although predicting what they might be from one period to the next is going to be difficult.
