The FTSE 100‘s miners have slumped to valuations that I reckon are just way too cheap, but they have started to pick up a little since the start of the year. And with a couple of key results coming in this week, we could see a nice bit of strengthening.
Full-year results from Rio Tinto (LSE: RIO)(NYSE: RIO.US) are due on Thursday 12th, and that’s after the company reported another robust quarter in terms of production. Global iron ore production was up 12% over the fourth quarter of 2013, and shipments actual rose a little ahead of that by 13% — we keep hearing of the feared drop off in demand from China, but the country’s growth rate keeps ticking along at around 7.5% and Rio Tinto can still sell all the iron it digs up.
Falling commodities
Low commodities prices should still signal a drop in EPS for 2014, forecast at 14%, with a further 20% fall penciled in for this year. But even though the share price is up 18% since mid December, we’re still only looking at P/E ratios of around 10 and 12.5 for this year and next, before the expected earnings recovery in 2016. And dividend rates are ticking along at a very nice 4.5% to 5% and nicely covered too.
We’ve seen similar things at Anglo American (LSE: AAL)(NASDAQOTH: AAUKY.US), which also reported a buoyant set of fourth-quarter production figures last month, and we’re due to get results on Friday 13th.
More iron
Production of iron ore, its biggest product, was up more than 10%, with coal production also up nicely. Of its key products, copper saw an 18% fall, but overall it was a pretty reasonable set of figures. Having said that, falling commodities prices are going to lead to some full-year impairments, but I don’t think that damages the investment case too much.
P/E values of 11.3 for the year just ended and 12.9 for this year are currently on the cards at a share price of 1,148p, and there’s a bigger recovery in 2016 being guessed at than for Rio Tinto, which would drop 2016’s multiple to only 9.
P/Es are tricky to evaluate for cyclical industries like this, so we shouldn’t rely too much on that measure alone. But if a mining company can pay well-covered dividends during periods of low commodities prices, that looks like a good signal to me.
Big dividends
Anglo American’s mooted dividend yields stand at around the 5% mark, and that’s a much higher level than we’ve seen in recent years. Cover isn’t quite as good as Rio Tinto’s, but at around twice covered based on 2014 expectations, it looks good enough to me.
When will the recovery in mining shares start? It might have already happened.
