It’s been a challenging year for the mining sector, with the prices of various commodities falling significantly and being expected to hurt the bottom lines of most of the sector. In fact, Rio Tinto (LSE: RIO) (NYSE: RIO.US) is set to report full-year results tomorrow that are significantly down on last year even though its production in 2014 increased at a double-digit rate.
And, with Anglo American (LSE: AAL) reporting later this week and Glencore (LSE: GLEN) deciding to cut its spending plans and spin-off its Lonmin stake (as highlighted in today’s production report), it’s a crucial period for the mining sector.
So, while the share prices of mining stocks could be volatile in the short run, now could be a great time to buy them. Here’s why.
With earnings numbers set to disappoint, sentiment in the mining sector has weakened significantly in recent months. As such, there is some great value on offer with, for example, Rio Tinto trading on a price to earnings (P/E) ratio of just 12.2 and Anglo American having a P/E ratio of only 12.3. Therefore, there could be significant upward reratings to both stocks as we move through the year – especially when you consider that the FTSE 100 trades on a P/E ratio of 15.9 at the present time.
Furthermore, the present difficulties regarding the bottom lines of mining companies are not expected to last, with cost cutting measures and the potential for a Chinese stimulus meaning that profitability is forecast to improve over the next couple of years. For example, Glencore is expected to increase its bottom line by 3% in the current year, followed by a further increase of 52% in 2016. That’s a staggering rate of growth and means that the company’s shares trade on a price to earnings growth (PEG) ratio of just 0.2, which indicates that growth is on offer at a very attractive price.
It’s a similar story with Antofagasta (LSE: ANTO), with it being expected to increase its bottom line by 3% this year, followed by growth of 43% next year. This puts it on a PEG ratio of just 0.3 which, although slightly higher than that of Glencore, still makes it a hugely appealing stock at the present time.
So, while the short term may see a decline in the profitability of Rio Tinto, Glencore, Anglo American and Antofagasta, their share prices seem to fully reflect this. And, with their prospects over the medium term being very bright, the combination of growth potential and relatively low valuations could equate to significant share price growth. As a result, now could be a great time to buy them ahead of what looks set to be a stunning year for Rio Tinto, Glencore, Anglo American and Antofagasta.
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