Why Is The Recovery At Rio Tinto plc, BHP Billiton plc And Antofagasta plc Faltering?

After a long slump, investors in the FTSE 100’s mining sector were finally starting to breathe a sigh of relief with share prices starting to pick up. From December’s lows, Rio Tinto (LSE: RIO)(NYSE: RIO.US) had gained 23% by late February. But since then the price has given up 12% to today’s 2,864p, despite a mini-rally in May.

The picture is similar at BHP Billiton (LSE: BLT)(NYSE: BBL.US), whose shares put on 29% only to fall back by 11% over a very similar timescale. Antofagasta (LSE: ANTO) hit its low in January and then regained 16% by late April, but it’s another that’s turned tail again and has since fallen 8% to 748p.

Results looking good

Results have been looking good, with Rio reporting a solid rise in iron ore production in its first quarter. BHP showed strong rises in copper and iron in its Q3 update, and despite some disruptions in its first quarter, Antofagasta lifted its copper production.

But despite that, forecasts have been scaled back a little over the past month, with EPS predictions for this year and next being cut for all three companies. Today, Rio Tinto is the only one of the trio favoured with a bullish Buy stance by the City’s analysts.

Why the downturn?

If we’re wondering why the reversal, we probably need to shift our eyes to the East. China is a massive consumer of raw materials these days, and its economy is perhaps the biggest driving force for the mining sector. It’s true that the latest manufacturing data from China came in slightly ahead of forecasts, but there’s growing concern over the country’s bubbling stock market, its rising property prices, and its overheating debt levsls.

While our own FTSE 100 has managed just a 1% gain over the past 12 months, China’s CSI300 index has doubled! The Shenzen exchange has an average P/E of more than 60, while others are even higher, and high-tech stocks are on ratings we haven’t seen in the West since the days of the dot com boom.

The Chinese bubble is going to burst, and when it does it will surely hit the government’s strategy of shifting more of its economy to private hands rather than being led by government projects. And that’s going to hurt demand for commodities.

Which is best?

Looking at these three miners, Antofagasta’s forward P/E of over 20 with a dividend yield of less than 2% makes it look vulnerable. BHP isn’t much better on the P/E front with a figure of 19 penciled in for 2016, and it’s 6% dividend yield expected that year would not be covered by earnings.

Rio Tinto looks the best of the three to me, with a forward P/E ratio of 16 this year dropping to 13 on 2016 forecasts, and its predicted dividends of close to 5.5% appear adequately covered.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.