The five-year performance chart of FTSE 100 listed miner Anglo American(LSE: AAL) looks like a long, steady slide into depression. Antofagasta (LSE: ANTO) looks similarly downcast. Glencore (LSE: GLEN) plots a similar downwards course, the only difference being that it looks like it’s jumped off a cliff in recent months.
I reckon all three will struggle to reverse their recent declines, although we may see the odd false dawn. True, Glencore’s share price has rebounded 25% over the past month, but I would urge caution about jumping in. The sector still has a lot of trouble ahead.
Think zinc
Glencore’s third-quarter 2015 production report, published today, shows it is making progress towards reducing its debt to a more manageable $20bn or so by the end of 2016, raising $2.5bn from September’s equity placement in September and another $2.4bn by suspending its dividends. Cutting zinc, copper and ferrochrome output should help balance supply and demand in these markets. Its shares are almost back at their level before September’s emergency placing, so someone is making money from this stock.
But Glencore still has a long way to go before investors can safely hop on board. If China continues to slow and metals prices fall further, its balance sheet could come under further pressure. I like a contrarian play as much as any Fool, but Glencore is still way too contrary for me.
Anglo woe
Citi has just cut Anglo American’s forecast earnings per share for 2016 from 46 US cents to 38 cents and lowered its target price from 650p to 600p. Some investors may be tempted by its lowly valuation of nine times earnings, but that crazy 9.43% yield points to problems to come.
Antofagasta recently cut its production guidance again and analysts are regularly downgrading their price targets. Perhaps I’m being too gloomy â the stock has rebounded 5% in the last month, and UK manufacturing figures suggest some signs of life in the global economy. Antofagasta’s earnings per share are set to fall around 56% this year but bullish forecasts suggest they could rise 67% in 2016. However, today’s surprisingly pricey valuation of 17.72 times earnings gives me little reason to buy.
Heavy metals
The share prices of all three stocks closely track the Bloomberg Commodity index, which continues to sink deeper into despair. The slump in the domestic Chinese steel market and rising Australian production have combined to send copper and iron ore prices into a spiral of decline. If you are pinning your hopes on a China revival the following gloomy prognosis from Exane BNP Paribas may shake your faith. The analyst firm said that “the outlook for steel and steelmaking raw materials looks even more dreadful as there is no evidence of production cuts commensurate with the excess capacity“.
The mining sector may look back longingly on happier times, but it has to accept that they won’t return. China has lost its lust for commodities. The US and Europe can’t replicate its ardour. Supply of minerals and metals is still too high given falling demand and the sector looks set to stay gloomy for some time yet.