Shares in the vast majority of mining companies are substantially down today after the World Bank downgraded its global growth forecasts. It now expects 3% growth in 2015, followed by 3.3% growth in 2016. Both of these figures are down on the previous estimates of 3.4% and 3.5% growth over the next two years respectively, with the World Bank stating that ‘risks to the outlook remain tilted to the downside’.
As a result of this, commodity prices are weaker, with the price of copper, for instance, falling by 1.3% to reach its lowest level since October 2009. This is despite data showing record Chinese imports of copper in 2014 being released and indicates that there is a real concern regarding the outlook for the mining sector in 2015 and beyond.
Share Price Falls
As you may expect, the share prices of mining companies have fallen heavily in response to the news, with the likes of Vedanta (LSE: VED) and Antofagasta (LSE: ANTO) down 17% and 7% respectively today. Both of these companies are major copper miners and, as a result of today’s fall, they now trade at their lowest levels since 2005 and 2009 respectively. And, in the short term at least, it would be of little surprise if investor sentiment worsened and their share prices came under more pressure — especially if the outlook for metals prices continues to deteriorate.
Looking Ahead
However, the longer term could prove to be a much more prosperous period for Antofagasta and Vedanta. As mentioned, China had a record year when it came to copper imports last year and, although growth in the world’s second largest economy has disappointed in recent months, the reduction in the Chinese interest rate is rumoured to be the first in a series of moves designed to stimulate growth. Certainly, any such measures could take time to have an effect, but they could at least improve investor sentiment in the near term.
Growth Potential
In fact, even though commodity prices are weak, Vedanta and Antofagasta are both forecast to deliver strong growth in earnings over the next couple of years. For example, Vedanta’s bottom line is set to rise by 36% this year, followed by further growth of 67% next year, while Antofagasta’s profit is forecast to increase by 11% and 24% in each of the next two years.
Despite such strong growth expectations, Vedanta and Antofagasta seem to offer excellent value for money, with a significant margin of safety being priced in. For example, Vedanta trades on a price to earnings (P/E) ratio of just 13, while Antofagasta has a rating of only 13.1. Both of these ratios, when combined with their respective growth potential, equate to exceptionally low price to earnings growth (PEG) ratios of just 0.3 (Vedanta) and 0.7 (Antofagasta).
As such, both companies may be highly volatile and experience a number of lumps and bumps during the course of 2015, however their share prices seem to offer significant margins of safety that mean they could soar in the long run.
