Three weeks ago, I wrote an article pointing out that, despite attractive-looking valuations, the share prices of the big diversified mining companies seemed locked in downtrend. The thrust of that scribbling was that investors might want to wait for a trend reversal before plunging into the shares of firms such as Rio Tinto (LSE: RIO) (NYSE: RIO. US), BHP Billiton (LSE: BLT) (NYSE: BBL.US) and Anglo American (LSE: AAL), because the cyclicality of the mining sector can lead traditional valuation measures to deceive us.
The bottom could be in
Looking back now, my writing coincided with what looks like the tentative start of a trend reversal for some mining shares. Indeed, commodity prices — such as those of copper, palladium and oil — seem to be curling up, suggesting better fortunes may be ahead for the miners.
The kind of bottoming we see now, and early suggestions of a change in trend, on these firms’ share-price charts is just the crucial ‘buy’ signal I’ve been waiting for — right now could end up being a good time to pitch into the big miners.
Mind you, I’d still caution against buying and holding big mining firms with nary a second thought. The overarching characteristic of the mining sector is its joined-at-the hip affinity with macro-economic cycles and supply-and-demand equations. Boom and bust is the name of the gain for the miners, so forget about justifying any purchase with the magnitude of the dividend or by cosying into the warm reassurance of a cheap-looking valuation.
A broad-brush approach to commodity prices, via investing in gargantuan diversified miners, strikes me as having merit. After all, we get dividend income and operational progress on top of any commodity price rises. However, I reckon the best idea is to try to catch the up-leg of the next cyclical rise, and nothing more — investing in the miners is a short-term occupation, unless, of course, we have a particular fondness for repeatedly passing ‘go’ and pride ourselves on not getting dizzy with the roundabout motion!
Diversification
The great appeal of the mega-sized mining firms such as Rio Tinto, BHP Billiton and Anglo American is their diversification. All three firms seem well spread in terms of their geographical operations and end markets, although there are differences in the mix of resources they produce.
Here’s a quick-check table to identify which products underpin an investment in each company. I’ll leave you to research the weighting each commodity takes in the firms’ portfolios!
|
BHP Billiton |
Rio Tinto |
Anglo American |
|
|
Aluminium |
Yes |
Yes |
|
|
Coal |
Yes |
Yes |
Yes |
|
Copper |
Yes |
Yes |
Yes |
|
Diamonds |
Yes |
Yes |
|
|
Iron ore |
Yes |
Yes |
Yes |
|
Manganese |
Yes |
Yes |
|
|
Nickel |
Yes |
Yes |
|
|
Niobium |
Yes |
||
|
Oil |
Yes |
||
|
Phosphates |
Yes |
||
|
Platinum |
Yes |
||
|
Potash |
Yes |
||
|
Uranium |
Yes |
The big staples coal, copper and iron ore feature in the list for all three firms. After that, each firm has its own character depending on the particular blend of commodities it deals with.
Recent news
Rio Tinto released what it describes as “robust” production figures for the fourth quarter of last year, while Anglo American delivered something of a mixed bag on production. Meanwhile, BHP Billiton reckons its operational performance over the last six months was strong.
