I love a contrarian buy as much as any investor, and you wont find a more contrarian FTSE sector than minerals and mining right now. Talk about a great mining disaster: folk singers should penballads about this bloodbath.Evraz,Kazakhmys andLonminhave crashed out of the FTSE 100 altogether. Global giants BHP Billiton and Rio Tinto are trading at levels last seen inthe heat of the financial crisis.
Glencore(LSE: GLEN)is now at 108p, downfrom its52-weekhigh of 339p.Anglo American (LSE: AAL)is down 80% overfive years,Antofagasta (LSE: ANTO)is down 60%. Investors clearly have plenty to lament. Otherswill sing of opportunities in this crisis, but I suggest you block your ears.
Anglo-American now yields an index-bashing9.59% and trades at just over five times earnings. Those are incredible figures for an established, globally diversified business. Itsprofits may have fallen 36% but it still posted first-half EBIT of $1.9bn. Management isfighting back, cutting costs and boosting productivity. The dividend may not be durable but Anglo American surely is. I can see the temptation.
Ditto Antofagasta. The Chilean copper minerisnt even thatcheap, trading at 18.5 times earnings and yielding 2.5%, despite a near-50% crash inhalf-year profits to $561.6m. Targeted savings of $160m this year will reduce some of the damage. Management reckons Chinese copper demand will reviveas it invests in its power infrastructure while mine closures by rivals will cut supply. So there is hope here as well.
Glencore isin a hole but Citi reckons its misfortunes have been overstated, noting that3.5 net debt to EBITDA for trading, a conservative two times on industrial assets and planning guidance puts the implied level of sustainable net debt at between $17-$20bn, broadly in line with the companys $20bn target for the end of 2016. Trading at just over eight times earnings and yielding 10%, it looks a bold, brave buy.
Dont be fooled. The future istougher than many analysts are willing to accept. Too many act asif the glory days of the Chinese infrastructure will return, but that story is played out. Yes, the recent Chinese quarterly GDP growth figure of 6.9% looked promising, but this was largely due to a booming domestic consumer sector, which offset slowing industrials.
Miners have ramped up production to meet a Chinese thirstfor commodities that has largelybeen slaked, leaving the market over-supplied. The price of copper may have halved since 2011 to$5,000per metric tonne, whileiron ore has collapsedfrom $200 per tonne in 2011 to around $50 today. But that doesnt mean they will recover, as they were arguably overpriced before.
As Guy Stephenson at Rowan Dartington points out: for much of the 1990s copper was far cheaper at $2,500, while iron ore was just $10 in 2003. He saysthe mining industry is stillgeared up for unsustainable prices. Today, it is difficult to see where any significant marginal demand will come from and we still have a glut of supply. Stephenson cant see that changing for the foreseeable future and frankly, neither can I.
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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.