The FTSE 100 has jumped 5.5% in the last couple of months, but there are still plenty of cheap shares on the index, including mining giants Glencore (LSE: GLEN) and Rio Tinto (LSE: RIO).
I prefer buying shares after a run of poor form, rather than when they’ve got their game face on and these two fit the bill. The Glencore share price has fallen 15.44% in the last year. It now looks incredibly good value, trading at 4.27 times earnings.
The Rio Tinto share price has climbed 8.19% in the last month but still ends the year roughly where it began, up just 0.14%. It’s cheap, but not as cheap as Glencore, trading at 9.1 times earnings.
Their performances could have been worse, given the problems afflicting China, the world’s leading consumer of metal and minerals for the last few decades.
China crisis hits miners
The Chinese economy has been looking shaky for years, as debt builds and ghost cities spread. This year’s post-Covid reopening was expected to fire up the economy, but proved a damp squib. Things came to a head over the summer with the $300bn bankruptcy of property developer Evergrande Group.
Swiss bank Julius Baer reckons Chinese growth will slow from 5.2% in 2023 to 4.4% in 2024, with home and retail sales particularly weak. The government is expected to continue its focus on “containing downside risks rather than providing a major growth boost”.
A year ago, investors were brimming with optimism over China. Today, they may be too pessimistic. It’s a contrarian call. Otherwise, Glencore and Rio Tinto may benefit from falling interest rates and a US soft landing, if we get them. The green transition may also boost demand.
Both companies faced issues of their own in 2023. Glencore’s nickel and ferrochrome output fell, amid maintenance outages and strike action. Yet it still hit output forecasts for copper, zinc, coal and cobalt and expects to report full-year adjusted earnings of between $3.5bn and $4bn. It has pretty hefty net debt of more than $28bn though.
Glencore’s debt is a concern
Rio Tinto’s Canadian iron ore production was knocked by extended plant downtime, conveyor belt failures and wildfires, but otherwise the group met production targets. Its debt is more manageable at $2.9bn.
Much now depends on macroeconomics. That’s impossible to predict, of course, so I won’t try. However, their cheap valuations offer both downside protection and upside potential. Since I buy stocks with a minimum 10-year view, I can give them time to deliver on the latter.
While I wait for the recovery there’s always the dividends. In full-year 2023, analysts expect Glencore to yield 7.07% and Rio Tinto to yield 5.68%. These are solid rates of income but future dividends from Glencore could prove a little bumpy, with analysts expecting its yield to drop to 3.85% in 2024. Rio’s should hold up at a better 5.93%.
I bought shares in Glencore over the summer. Given its high net debt and unstable yield, I won’t buy more. I’ve been meaning to add Rio Tinto to my portfolio for months and hope to scrape together enough cash to buy it in January or February. I just hope it’s still cheap then.
