Thishas been a blockbuster year for mining stocks, with the sector surgingin styleafter a disastrous 2015 and nightmarestart to2016. MininggiantsAnglo American and Glencore turned intounlikely three- and two-baggers respectively, making them the biggest winners on the FTSE 100, as the entire sectorlifted itselfout of the pit of despair.
A good year for the miners
BHP Billiton (LSE: BLT) was the third best performer on the index, rising 78%, according to research by Hargreaves Lansdown, closely followed by Fresnillo and Rio Tinto. It was an astonishing turnaround, but the scale of the sell-off had beenequallystunning.
At the end of January, BHP Billiton was down 75% from its all-time high and yielding an astonishing 9.8%. Investors who bought the stock anticipating double-digit income will have been disappointed, because in February the companyslashed its dividend by 75%, the first cutin 18 years, as first-half profits tumbled by a 92%. Today, it yields just 1.9%.
Lifecycles
Commodity stocks are notoriously cyclical, and its tempting to claim thiswas just another turn of the investment wheel of fortune. BHPBilliton had just becometoo cheap, attracting buyers once sentiment turned.Miners alsobenefitted from improving sentiment in China, as the authorities encouragedyet more stimulus in a bid to propelthe debt-funded boom for another 18 months.
But BHP Billiton and the other miners deserve a good dealof the credit for overhauling their operations, slashing costs, reducing capex and disposing of non-core assets. This willhelp them pay down debt, strengthen balance sheets and return to profitability.
Be bold, buy BHP
Looking back at Fool articles written at the height of January and Februarys carnage, its goodto see so many writers encouraging investors to be bold and buy BHP Billiton. I hope you listened because I didnt, gloomily predictingthe end of the commodity super-cycle instead,and missed out on all the fun. I was a happycommodity bear in 2014 (when I sold BHP) but out of sorts this year.
BHP Billitons five-year share price slide from 25 to 5 reversed in February, as the rising iron ore price boostedthe worldslowest-cost large-scale producer. Managementwasrewarded for its controversial policy of ramping up productionto squeezemore expensive rivals.
Billiton blitz
BHP Billiton is a large-scale producer as well as a miner, and has beenhelped by the recent recovery in the oil price, in the wakeof the OPEC and non-OPEC production cuts. It wasalso lifted by President-elect Trumps proposed infrastructure blitz, whichshould drive up demand for metals. Chinese GDP growth has stabilised at a respectable 6.7% this year, supplyinganother tailwind. These forces may wane next year.
BHP Billiton has been a great contrarian play for the brave in 2016 and there could be more to come. Pre-tax profits in the year to 30 June 2017 are forecast to hit 7.46bn, a smart reversal from last years 7.26bn loss. Forecast earnings per share growth isan incredible 368%, which should help to trim todays sky-high valuation of 69.9 times earnings. The company is on the mend, just dont expect it to repeat this years surge in 2017.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.