Why BHP Billiton plc, Rio Tinto plc, Glencore plc And Anglo American plc Are Racing Ahead In 2014

2014 has been a damp squib for many equity investors. We’re more than halfway through February and the FTSE 100 is flat on the year. It’s a far cry from last year’s rip-roaring stock market, although an improvement on a fortnight ago when the UK market found itself nearly 5% down in 2013.

One group of companies is bucking the trend, though, and that’s the diversified mining giants.

As I write, the share price of BHP Billiton (LSE: BLT) is up nearly 4% this year, with its arch-rival Rio Tinto (LSE: RIO) already over that particular hurdle.  And these advances are modest compared to two other giants. Glencore Xstrata (LSE: GLEN) has seen its shares soar better than 10%, while Anglo American (LSE: AAL) — a relative minnow at a mere £22 billion – is up more than 18%.

Between them these four companies comprise £235 billion in total market capitalisation, and comprise a big slug of the FTSE All-Share they’re moving ahead of.

Who says elephants can’t gallop?

What goes down can go up

The obvious question is why these big shares are doing well now, and whether it can continue.

The first answer to that is to realise that this strength in mining shares actually kicked in last summer. All the companies I’ve mentioned hit their low points in early July 2013, as a string of writedowns of expensive assets acquired during the peak of the mining sector boom seemingly wrote the final chapter on the so-called commodity super-cycle. With China slowing and the US recovery apparently losing steam, investors feared worse to come.

But in investing it’s often darkest before the dawn, and that seems to have happened with mining shares, too.

Investors were right to guess that China would no longer be quite so greedy for just about all the commodities the miners could mine, but the country has so far avoided a hard landing. Urbanisation continues, and materials and energy are still required.

What’s more, as the US economy has gained traction and one or two European countries have shown more than a sliver of a pulse, the hope that Chinese factories would start ramping up production to meet reviving demand from global markets has also boosted hopes for the sector.

A capital idea

At least as important, however, have been changes both at management and culture at the diversified miners. BHP, Rio and Anglo have all seen changes at the top, while Glencore has devoured and consolidated Xstrata, taking out another big mining CEO along the way.

Incoming managers have in turn been able to blame the previous guv’nors for going crazy in the boom years, and instead preached a gospel of restraint, prudent capital allocation and a focus on shareholder returns.

For example, just this week BHP Billiton’s CEO introduced his company’s unexpectedly good results with the boast that:

“The commitment we made 18 months ago to deliver more tonnes and more barrels from our existing infrastructure at a lower unit cost is delivering tangible results.”

Similarly, the boss of Rio Tinto’s first words to his shareholders alongside that company’s full-year results last week was:

“These strong results reflect the progress we are making to transform our business and demonstrate how we are fulfilling our commitments to improve performance, strengthen the balance sheet and deliver greater value for shareholders.”

These CEOs know which side their bread is buttered on.

Dividends on demand

In the current climate investors don’t want to hear any more about record production, the insatiable appetite of the developing markets or grandiose plans for marginal mines in the middle of nowhere.

They want to see assets being sweated to deliver the maximum return for their bucks.

As mining companies have begun to deliver that, their share prices have risen.

Can it continue? If demand does hold up and the big firms manage to keep a lid on supply to help support prices, then their shares are arguably inexpensive, given their formidable assets and unmatched diversification. The recent run up in miners’ share prices has hardly reversed the big falls suffered between late 2010 and 2013, and the shares are on higher dividend yields than for many years, too.

On the other hand mining is a notoriously cyclical sector, and it’s hard to be sure these companies won’t go back to their old ways. That won’t matter if commodity prices are maintained or better yet recover, but if the global economy hits another speed bump, those chunky dividend payouts could be threatened.

Any long-term portfolio focused on dividend income should probably include at least one major mining company. While their share prices will be choppy and they'll certainly wax and wane with the world's macro-economic fortunes, they're just too important to ignore.

However it makes sense to hold them with lots of other less risky dividend paying companies in order to add stability to your income portfolio. Download our free report on dividend shares to get a head start.

> Owain owns shares in Fresnillo and BHP Billiton.