I love a contrarian buy as much as any investor, and you won’t find a more contrarian FTSE sector than minerals and mining right now. Talk about a great mining disaster: folk singers should pen ballads about this bloodbath. Evraz, Kazakhmys and Lonmin have crashed out of the FTSE 100 altogether. Global giants BHP Billiton and Rio Tinto are trading at levels last seen in the heat of the financial crisis.
Glencore (LSE: GLEN) is now at 108p, down from its 52-week high of 339p. Anglo American (LSE: AAL) is down 80% over five years, Antofagasta (LSE: ANTO) is down 60%. Investors clearly have plenty to lament. Others will sing of opportunities in this crisis, but I suggest you block your ears.
American Pie
Anglo-American now yields an index-bashing 9.59% and trades at just over five times earnings. Those are incredible figures for an established, globally diversified business. Its profits may have fallen 36% but it still posted first-half EBIT of $1.9bn. Management is fighting 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 miner isn’t even that cheap, trading at 18.5 times earnings and yielding 2.5%, despite a near-50% crash in half-year profits to $561.6m. Targeted savings of $160m this year will reduce some of the damage. Management reckons Chinese copper demand will revive as it invests in its power infrastructure while mine closures by rivals will cut supply. So there is hope here as well.Â
Glencore is in a hole but Citi reckons its misfortunes have been overstated, noting that 3.5 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 company’s $20bn target for the end of 2016. Trading at just over eight times earnings and yielding 10%, it looks a bold, brave buy.
Macro Misery
Don’t be fooled. The future is tougher than many analysts are willing to accept. Too many act as if 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 thirst for commodities that has largely been slaked, leaving the market over-supplied. The price of copper may have halved since 2011 to $5,000 per metric tonne, while iron ore has collapsed from $200 per tonne in 2011 to around $50 today. But that doesn’t 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 says the mining industry is still geared 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 can’t see that changing for the foreseeable future and frankly, neither can I.