It would appear that the market bulls have had a very good break over the Easter holidays. In early trading yesterday, the FTSE 100was again trading over the magic number of 7000, although much of this will be down to some of the big mining and oil companies in particular, BG Group, following the approach from Royal Dutch Shell.
It seems that miners are also back in fashion, and its three of these stocks that Im going to take a look at today and expand on why Im not planning to buy them just yet, at any rate.
BHP
BHP Billiton (LSE: BLT) is, in my view, one of the most diversified miners listed in London. It has been in the news, mainly for lower commodity prices and for a rather large demerger, as the company spins off South32.
On the positive side, it has promised that the dividend to BHP shareholders will not be reduced and will continue to be progressive at current prices, investors can expect a growing yield approaching 6%. In addition, should the demerger be approved, shareholders will receive one new South32 share for each existing BHP share they hold. Each company will pay a dividend, and South32 is expected to distribute at least 40% of its underlying earnings to shareholders starting from the year ending in December 2015.
Additionally, the company is also concentrating on efficiency, and expects to make savings totalling $4 billion by the end of the 2017 financial year.
Rio Tinto
A quick look at Rio Tinto (LSE: RIO), and you quickly see another stock trading on a below market 12 times forward earnings and a near 6% yield. This is another global mining group that focuses on finding, mining and processing the Earths mineral resources. The companys major products are iron ore, aluminum, copper, diamonds, coal, uranium, gold and industrial minerals (borates, titanium dioxide and salt). Like BHP, it does its business across the world. In addition to the dividend yield on offer, there is currently a US$2 billion share buyback. Only this week, the company announced that it had purchased around 11.6 million shares at a 14% discount to the market price. Personally, Im not sure whether this bodes well for the company or not Im left asking the question, why would the seller be prepared to sell the shares at such a discount?
It is fair to say that this could well be a savvy move by managementif the shares are indeed at a low point.
Anglo American
Anglo American (LSE: AAL) is the final mining company under review today. Like the others, the companys portfolio include bulk commodities which consists of iron and manganese, metallurgical coal and thermal; base metals, which consists of copper, nickel and niobium; precious metals and minerals, including platinum and diamonds, which it extracts from operations throughout the world.
At the risk of sounding repetitive, it also yields over 5% and doesnt look expensive on first inspection, with the shares trading on an inexpensive 11 times 2015 earnings.
Final Thought
So: whats my problem? Why havent I filled my boots?
As you can see from the chart, all of these companies have underperformed the FTSE 100 over the last year, as the price of commodities fell. I think that you could argue that these miners have looked cheap for a while, but investors who have bought in would now be sitting on a sizable loss.
My main problem, with these and similar companies, is that they rely on the prices of the commodities that they dig out of the ground, and their share price seems to move with these prices, which at times can be quite volatile. My fear here is that prices will remain lower for longer, resulting in more earnings downgrades and increasing the possibility of lower share prices. If things got really bad, I wouldnt be surprised to see the dividend cut, too.
Personally, I would be looking to buy following a further downturn, when there is real negativity surrounding the stocks it is at times like that when good money can be made by investors.
Indeed, it is true that some serious money will be made some people trading these miners, there will will also be serious losses incurred as investors chase up the prices, only to find that one requires a strong stomach to play in this sector.
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Dave Sullivan 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.