Its an act of heroism to be a contrarian investor amidtodays market meltdown. Butits at times like these when others arelosing theirnerve that you can make your fortune. The question is whether investing in beleaguered mining giantsAnglo American (LSE: AAL) and Glencore (LSE: GLEN) is brave or simply crazy.
Crazy days
Any investor who tried to catch these two falling knives over the last year will be counting their fingers today. Anglo American has lost 80% of its share value in that time, while Glencore is down 72%. The bloodbath has continued in the last chaotic week, with their shares collapsing20% and 12%, respectively.
Both companys woescan be summed up in a single word: China. The long-standing question over whether the worlds second-largest economy is facinga hard or soft landing lookssettled, and the answer isnt the one we wanted. On Thursday, China postedthe wholly unwanted record of having its shortest evertrading day, with the stock market closing injust 870 seconds after regulators invoked its new (and now abandoned) circuit breaker forthe second time in a week. The share selling frenzy has been described as hysterical.
Burn baby burn
The Chinese government is burning through its reserves as it tries to prop up its currency and prevent further capital flight. But even if it avoids a hard landing, its appetitefor commodities will continue to diminish as the government shiftsits economy away from industry and infrastructure and towards domestic consumption. If Anglo American and Glencore are to escape their plight they cantrely on a revival in Chinese demand, which is bad news, given that this is what drove them during the glory growth years. No other country is set to pick up the slack.
Anglo American has responded in pretty much the only way it can, by cutting investment, sellingassets and slashingjobs, as well as refocusing the business on its most profitable areas. It has also scrapped its dividend. If it hadnt, it would be yielding an insane 24%.Today you can buy the stock for 244p but Barclays Capital has set a target of 225p, suggesting it could have another 8% or so to fall. Given current volatility, it could manage that in a day. Withpre-tax profits expected to fall from 1.54bn to $1.1bn this year, and earnings per share (EPS) set to drop a further 36%, contrarian buyers should be under no illusions about the scale of the threats that lie ahead.
Lonely are the brave
Troubled Glencore has slashed capex and cut its debt burden by $8.7bn, whiletargeting another $3bn of reduction measures to shrink itto 13bn. It also boasts $2bn of free cash flow at spot prices and has increased itsliquidity to more than $14bn. It will need every dollar, as commodity prices and demand continue to struggle. Trading at just 5.5 times earnings, its certainly cheap and its prospects look better than Anglo Americans with earnings forecast to rise from 859m in 2016 to 1.16bn this year. EPSshould jump 19%.
My problem is that I struggle to trust any forecast at the moment, given the China meltdown. If I had to choose, it would be Glencore. Frankly, Im not brave enough to buy either today. Maybe one day Ill ruemy cowardice.
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Harvey Jones 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.
