We have got so used to commodity stocks falling like so many stones that the reversal of recent days came as a surprise. With the mining sector touching lows last experienced in the 1982 recession, an upswing was almost inevitable at some point, but few people expected it so soon.
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 as Anglo American (LSE: AAL), Antofagasta (LSE: ANTO) and Glencore (LSE: GLEN).
Talk About Trouble
Troubled Glencore has weighed heavily on the mining sector, but the stock finally had a spring in its step on Monday as reports emerged that it was open to takeover offers, and was looking to sell a $2bn stake in its agricultural business. Disposal plans are welcome given the company’s near-$30bn debt pile, but the real sentiment-shifter was the rumoured Chinese 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 to Glencore. While today’s lowly valuation makes it a tempting target rival miners may be reluctant to leverage up in today’s uncertain climate.
Lighter Metals
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. That 9.22% 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, you would be sitting on a 35% gain today.
Anglo American was up a whopping 10% on Wednesday alone following an 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 reckons commodity prices could rise 19% by 2017.
Mineral Wealth
Anglo-American is up 20% in the last week, but still yields 8.44% and trades at a bargain basement 5.44 times earnings. Its earnings have fallen on lower metals prices, 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 it out 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.