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 weve been seeing a recovery in the sector. But is it premature optimism or the genuine start of a new bull run?
Strong recovery
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 thats 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 minings darkest periods.
Weve 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 days biggest risers.
After an 80% fall in EPS for the year ended 30 June, BHPs 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 thats a big improvement on the trailing multiple of 54 produced by this years 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 thats one good sign. Then we have the likelihood of economic stimulus policies being continued for quite some time across Europe as the eurozone cant 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. Were 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 its 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 Marchs 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 were 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 doesnt really mean much.
But even with that in mind, I think its just too early to evaluate the long-term success of Lonmins recovery, and the massive share price rise this year has taken away the safety margin that Id 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.
