It seems hardly any time ago that mining shares were plunging day after day. The slide had to come to an end eventually, and since January we’ve been seeing a recovery in the sector. But is it premature optimism or the genuine start of a new bull run?
You could be forgiven for seeing an investment in BHP Billiton (LSE: BLT) five years ago as having been a disaster, with the share price down 36% over that period. But that’s reckoning without dividends, which would have brought you a 47% total yield to put your investment in profit overall — not too disastrous for one of mining’s darkest periods.
We’ve also seen a recovery of late, with the shares up 89% since 20 January, to 1,100p — and that includes a 4.6% gain today, putting BHP among the day’s biggest risers.
After an 80% fall in EPS for the year ended 30 June, BHP’s earnings are expected to improve dramatically in the coming 12 months with a 123% gain predicted. It would still leave the shares on a high-looking P/E ratio of 28, but that’s a big improvement on the trailing multiple of 54 produced by this year’s results. And if we really have seen the start of a mining recovery, the P/E could tumble in the coming years.
The much-feared Chinese slowdown looks to be petering out, so that’s one good sign. Then we have the likelihood of economic stimulus policies being continued for quite some time — across Europe as the eurozone can’t shake off its weakness, in the UK following the Brexit vote, and in the US where it looks like a freer economic approach is the order of the day.
That all makes me feel positive towards a diversified miner like BHP Billiton for the next five years, though the real time to have picked the recovery was around six months ago.
Back from disaster
The share price performance at platinum group miner Lonmin (LSE: LMI) over five years has been far worse. We’re looking at a 97% fall, but without the dividends that saved the day for BHP Billiton investors — Lonmin canned its annual payouts in 2012, and there are only tiny 0.1% yields on the cards for this year and next.
But the price recovery since 21 January has been dramatic — with a 7.8% rise today to 200p, the shares have soared more than fivefold from 36.75p. Is that a sign that it’s time to pile in?
I have my doubts. On the plus side, the company has transformed itself impressively with some serious cost-cutting bearing fruit, it has come through a successful fundraising, and at March’s interim stage it was able to report net cash on its books of $114m (from a net debt of $185m at the end of September 2015).
But we’re not expecting to see any return to profit before 2017, with the year ending September 2016 expected to bring an (admittedly small) loss — results are due in November. The forecast P/E of 71 based on 2017 forecasts looks eye-watering, but in a turnaround year it doesn’t really mean much.
But even with that in mind, I think it’s just too early to evaluate the long-term success of Lonmin’s recovery, and the massive share price rise this year has taken away the safety margin that I’d like to see at this stage.
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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.