When two company share prices move in synchronisedlockstep you know that wider market conditions are to blame rather than individual company quirks.
Mining giants BHP Billiton (LSE: BLT) and Rio Tinto (LSE: RIO) are both up around 23% over the last month as investors decide theyve overdone the commodity sell-off and there are bargains to be had in this sector.
This is a clearexample of how shifts in investor sentiment can drive share prices, even when theyfundamentals havent changed that much. While Rio Tinto isseen as the stronger company with a more solid balance sheet, this shift is affecting both stocksin equal measure.
If you were canny enough to dive into either of these stocks at their recent lows, then I congratulate you. You spotted a valuation opportunity and took it.
Neither company has risen because it delivered good news to investors, quite the reverse.
Rio Tinto recently posted a full-year loss of $866m, a shocking collapse from last years profit of $6.5bn. Except of course investors werent shocked, they knew exactly what to expect.
Which is why they were willing to dig a little deeper, and unearth comforting nuggets such as the fact that Rio actually made an underlying profit of $4.5bn last year (provided you overlookminor matters such as impairments, writedowns and derivatives losses).
Investors were also relieved that Rio Tinto will be paying its full-year dividend of $2.15 per share, even thoughmanagements decision to scrap its progressive policy is surely laying the groundwork for a cut later this year.
Thanks to lower cost production, net cash flows of $9.4bn and a relatively healthy net-to-debt equity ratio of 24%, Rio looks better placed to withstand the commodity price downturn than many of its rivals, despite its heavy dependency on a single metal, iron ore. But even at todays valuation of 11.66 times earnings it could struggle to maintain its share price comeback in the face of further commodity price volatility. Natural resources stocksarent out of their hole yet.
Thanks a Billiton
BHP Billitons rebound iseven more surprisingafterthis weeks 74% cut in its interim dividend from 62 cents to 16 cents, ending 15 years of increases. With a double-digit yield and wafer thin cover, markets knew what was going to happen and had already assumed the brace position. Maybe they were simply glad that management had finally got thebad news out of the way.
The dividend cut was actually worse than markets expected but couldnt be avoided followingthe 84% plunge in operating profits to $1.3bn and statutory loss of $5.7bn on impairment charges. With BHPs management steeling itself for a prolonged period of volatile commodity prices, investors were happy towrap themselves inthe comfort blanket of a pledge to pay out 50% of earnings in future.With BHP Billitons net debt rising another$1.5bn to $25.9bn, and gearing up from 22.4% to 29.7%, thefuture will remain rocky.
BLT and RIOare relying on cutting capex and slashing costs to help them muddlethrough the current crisis, but ultimately both need arecovery incommodity prices, which I dont see coming just yet. The recent comeback has been impressive but todays buyers should still dig-in for the long haul.
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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.