We have gotso usedto commodity stocks falling like so many stones that the reversal of recent days came as a surprise.With themining sector touchinglows lastexperienced in the 1982 recession, anupswing wasalmostinevitable at some point, but few people expected it sosoon.
Investors shrugged off disappointing Chinese data and IMF warnings of an impending $3 trillion global crunch to rush back into metals and minerals this week. The question now is whether the recent rally is sustainable. If it is, now could be the perfect time to buy fallen mining giants such asAnglo American (LSE: AAL), Antofagasta (LSE: ANTO)and Glencore (LSE: GLEN).
Talk About Trouble
TroubledGlencore has weighed heavily onthe mining sector, but the stock finally had a spring in its stepon Monday as reports emerged that it wasopen to takeover offers, and was lookingto sell a $2bn stake in its agricultural business. Disposal plans arewelcomegiventhe companys near-$30bn debt pile, but the real sentiment-shifterwas the rumouredChinese stimulus package, which had mining stocks fizzing once again.
I make it a rule to never get overly excited by takeover talk and this certainly applies toGlencore. While todayslowlyvaluation makes it a tempting target rival minersmay be reluctant to leverage up in todays uncertain climate.
Glencore is down 50% in the last three months which may tempt bargain hunters but it still looks too risky to me, especially given signs of management hubris. That9.22% yield clearly points to its problems. Mind you,if you were far-sighted enough to buy this one week ago, at the height of its troubles, youwould be sitting on a 35% gain today.
Anglo American was up a whopping 10% on Wednesday alonefollowingan upgrade by Morgan Stanley. The investment bank also lifted its view on the European metals and mining sector to attractive from in line, which boosted Antofagasta as well, which rose around 10% on the day. Morgan Stanley was impressed by more stable data from China and a potential stimulus uplift, and reckonscommodityprices could rise 19% by 2017.
Anglo-American is up 20% in the last week, but still yields 8.44% and trades at a bargain basement 5.44 times earnings. Itsearnings have fallen on lower metalsprices, but disposals have cut its debt pile to around $12bn, which management reckons is manageable despite current volatility. If you are bullish about the prospects for the mining sector this could be the stock to buy: despite the recent recovery it is still 50% cheaper than a year ago.
Antofagasta is less of a bargain trading at 18.95 times earnings and yielding just 2.36%, having been spared the worst of the recent sell-off. It is up 15% in the last week. Yet plunging revenues and a recent dividend cut still mark itout as a company with a fight on its hands.
I remain cautious about the commodity sector. But if you are feeling brave and expect the current revival to continue, Anglo American looks the most tempting of the three.
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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.