Mao Zedong famously once urged his people to overtake Britain and match America in steel production. Sadly, that was during the disatrous Great Leap Forward, which condemned his country to famine and millions to starvation. But this time around, China is doing a lot better, and its imports of iron ore and other minerals are driving the entire world’s mining sector.
But with the country’s stock market collapsing, pressure is once again on our FTSE 100 mining stocks — the Shanghai Composite index recovered 5.8% today, but that was purely due to political manipulation as the government forbade large investors from selling and forced them to buy instead.
The Anglo-Australian BHP Billiton (LSE: BLT)(NYSE: BBL.US) is one of the worlds biggest mining firms, yet its shares are down 36% over the past 12 months to 1,220p, with a 13.5% drop since the Chinese bubble started to deflate in June. But does that give us a bargain now?
Forecasts still suggest dividend yields of better than 6% this year and next, but with earnings per share (EPS) expected to collapse by 44% this year and 28% next, sustaining that level of payout looks very unlikely to me. I’m sure BHP is a great long-term company, but for me it’s still overvalued right now, based on the current economic outlook.
Pretty much the same thing has happened to Glencore (LSE: GLEN)(NASDAQOTH:GLNCY.US), whose share price was fallen 31% in a year to 242p, and by 14% in the recent Chinese slump.
But in this case we’re looking at healthier forecasts, with EPS expected to rise handsomely in 2016 to drop the P/E to just 11.1 — and dividends, forecast to yield around 4.5%, would be well covered on those figures. Forecasts will need to be updated to reflect the Chinese storm and they will surely be downgraded a little, but Glencore looks a better bet to me.
Then we come to Anglo American (LSE: AAL), which has suffered a dreadful few years of its own in addition to any international pressure, with EPS falling steadily every year since 2011. The woes are expected to continue this year with a further 40% slump expected, but there’s a turnaround on the cards for next year.
There’s been no suggestion of a dividend cut yet, and we’d see yields of 6% if the cash payment is upheld, and by 2016 it would be reasonably well covered if forecasts hold true. With a 2016 P/E of 10, Anglo American could be a recovery bargain.
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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.