Today I am looking at whether natural resources specialists Rio Tinto (LSE: RIO) (NYSE: RIO.US), Antofagasta (LSE: ANTO) or Vedanta Resources (LSE: VED) are robust stock candidates.
Rio leads in the value stakes
On a pure earnings basis, none of the mining shares provides show-stopping bang for one’s buck, in my opinion, although Rio Tinto is undoubtedly the ‘best’ priced stock of the three.
Following on from last year’s 9% earnings decline, further weakness across commodity markets is expected to push Rio Tinto’s bottom line 25% lower in 2015, resulting in a P/E rating of 12.9 times predicted earnings. Any reading around or below 15 times is widely regarded as decent value for money.
Copper miner Antofagasta, who’s expecting 2% bottom line improvement this year, culminates in an earnings multiple of 17.1 times. And Vedanta brings up the rear, with an estimated 99% earnings decline for the year concluding March 2015, resulting in a P/E rating of 103.8 times. Expectations of a stunning turnaround in the next fiscal year pushes this to 28.7 times, still an expensive readout, however.
A mixed commodity outlook
Still, it could be argued that Rio Tinto’s huge reliance upon the beleaguered iron ore sector merits its cheap price.
The miner sources around three-quarters of all profits from the commodity, so a cooling Chinese steelmaking industry and rising ore production explains Rio Tinto’s relatively low P/E multiple. Indeed, Morgan Stanley expects iron ore to average around $75 per tonne through to the close of 2018, down from $90 in 2014, owing to abundant supply from Australia and Brazil.
More cheerily, however, the broker expects oil prices to begin to creep up again following the collapse of recent months: good news for Vedanta, which sources around a third of earnings from this one market. An average of $70 per barrel is currently pencilled in for this year, up from around $60 recently, and which is anticipated to rise to $88 in 2016 before reclaiming $100 in 2017.
Morgan Stanley is also bullish on the copper market, no doubt music to the ears of Antofagasta. The red metal is expected to flourish on the back of strong demand from the automobile, white goods and construction sectors, creating an average of around $7,050 per tonne for 2015 compared with $6,880 in 2014. And this is expected to progress to $7,280 next year before marching to $7,600 in 2017.
But fragile global economy casts shadow
Still, I believe that the perilous state of the global economy could see these forecasts blown to smithereens in the coming months. Chinese factory floor activity continues to stutter and the construction sector is on its knees, while key economic data from the eurozone remains uneven at best.
To be fair, the companies I have mentioned have undertaken significant steps to mitigate the effect of falling revenues. From significant capex reductions through to project divestments, all three firms have been busy creating more agile and cost-effective entities should an environment of poor raw material prices persist.
But given the possibility of persistent demand weakness and production ramp-ups across the globe, I believe that all three miners remain at risk of significant — and prolonged — earnings woe.