After spending heavily to develop high-cost mines duringthe 2009 2012 commodity boom, these miners found themselves scrambling to cut costs as the prices of key commodities slumped during 2013.
However, for the most part, Rio, Vedanta, KAZ and Glencore have now stabilised their operations. High-cost projects have been shelved, unnecessary costs have been cut, and strategies have been rethought.
So, is now the time to buy these miners as they start to recover from past mistakes?
As the worlds largest iron ore miner, Rio has fared better than most as the price of iron ore has collapsed.
Indeed, City analysts believe that Rios average iron ore cash cost of production is around $30 per tonne, which gives the company plenty of room for manoeuvre.
Whats more, Rio slashed capital spending by $4.8bn billion during 2014 to save cash. Net debt dropped from $18.1bn to $12.5bn during the year. Further cash cost improvements of $750m are expected to be realised in 2015.
These efforts are designed to offset falling commodity prices and safeguard Rios dividend yield.
So, while growth remains elusive, Rios investors are still set to receivea dividend yield of 5.2% this year.The company trades at a forward P/E of 16.4.
Vedanta Resources is currently in the process of trying to consolidate some of its sprawlingsubsidiaries. With more than ten unlistedsubsidiaries, Vedanta is a complicated business.
Still, plans have recently been unveiled to merge two of the groupsIndia-listedsubsidiaries Vedanta Ltd and Cairn India, which would simplify the overall group structure and unlock cash. Cairn India has$3bn in net cash on its balance sheet.
Consolidation could be the catalyst that kick-starts Vedantas growth.
An upcoming catalyst could also kick-start KAZs growth. Specifically, the companysmuch anticipated Bozshakol copper project in Kazakhstan is due to start production during thefirst half of 2016.
If everything goes to plan, City analysts believe that KAZ could generate a pre-tax profit of 35m during 2016 earnings per share of 11.7p. For the past two years, KAZ has reported a loss.
Still, even after returning to profit, based on current forecasts, KAZlooks expensive. The company is trading at a 2016 P/E of 28.5.
Mining giant and commodity trading houseGlencorelooks like a great growth play. This year the companys earnings per share are forecast to expand by 13% to 15.2p. Next year, earnings per share are set to expand by a further 47% to 22.4p.
All in all, these figures suggest that Glencore is trading at a forward P/E of 19.5, and 2016 P/E of 12.6.
Moreover, the company currently supports a dividend yield of 4.1%, and the payout is set to increase at around 7% per annum for the next few years.
Miners like Rio, KAZ, Vedanta and Glencore don’t have much control over their ownfutures. They’re always at the mercy of volatile commodity prices, and as we’ve seen over the past decade, this can lead to volatile trading.
The best companies can set their own prices, allowing them to maintain profit margins and sustain a high return on capital. Andthere are five such companiesthat we believe should have a place in anyinvestorsportfolio.
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