Miners contributed to a rise in the FTSE 100 on Friday, when most of the players in the industry recorded outstanding returns. Shareholders of Rio Tinto (LSE: RIO), Anglo American (LSE: AAL) and BHP Billiton (LSE: BHP) are not having the best of times, however, and may be tempted to cut their losses before it get even worse.
Glencore‘s first-quarter production figures, which were released today, did not make for a good reading — oil assets did not live up to expectations, while mining assets are a bit troubled.
In truth, a correction in commodity prices was long overdue, and the depressed valuations of most assets in the mining sector is hardly surprising. Here, I discuss two different scenarios for Rio, Anglo and BHP.
Anglo: Bears vs Bulls
Bulls: The stock is down 2% this year, but has rallied 17% in the last four weeks of trading. At 1,165p, it trades in line with the average price target from brokers. Those in the bull camp suggest upside could be more than 80% from its current level, but that’s a realistic scenario only if Anglo receives a takeover offer. Only a small number of analysts forecast as much as 25% downside from its current level.
Bears: My take is that Anglo is the most appealing takeover target in the industry, but it’s not favoured by trends, according to which most players must shrink rather than grow — and there’s been little appetite for its assets of late. Margins have been declining since 2010, while flat revenue and trading multiples point to volatility in its stock price in the next 12 to 18 months.
Rio Tinto: Bears vs Bulls
Bulls: If top-end estimates from analysts are met, Rio could offer 50% upside for its current level, which is a very bullish scenario, in my opinion. Rio is up 1% so far this year, with most of the gains (+9%) coming in the last month of trading. At about 3,000p, it trades about 8% below the average price target form brokers, but upside could be greater, assuming its dividend is safe, the bulls insist.
Bears: If the bears are right, downside could be as much as 35%, and that’s based on its risky iron ore strategy and dividend risk. Its profitability is coming under pressure following a period of strength between 2012 and 2014 and, although it is cutting back on capex, its financials are not particularly reassuring, while its forward trading multiples point to more downside than upside.
BHP: Bears vs Bulls
Bulls: BHP is at the forefront of competition given that it’s spinning off certain “high quality assets“, as BHP says. It currently trades in line with estimates from brokers, and has risen 12% in the last month. According to top-end estimates from analysts, upside could be in the region of 25%, and there’s merit in the view that a leaner BHP could command a premium versus its rivals, I’d argue.
Bears: BHP aims to create an independent global metals and mining company (South32): approval for the demerger will be sought at shareholder meetings to be held in Perth and London tomorrow. One of the big problems for BHP is that the demerger plan hasn’t really helped boost its valuation, with the stock down about 20% since last August, when shareholders were expecting a multi-billion stock buyback instead. Options are thin on the ground, and execution risk in such extraordinary activity must not be underestimated.