Recent years have been disastrous for commodity stocks, with the Chinese-fuelled supercycle punctured and global growth running out of road. But not all miners were created equal. Here are three commodity stocks with very different prospects right now.
Iron Men
One month ago, I declared FTSE 100 giant BHP Billiton (LSE: BLT) a full-blown mining disaster. It is down another 20% since then, as its props continue to collapse. Over five years is share price is down 60%, and investors who have hung on hoping to recoup their losses have been buried. Right now there seems no end to the misery. Especially with International FC Stone analyst Ed Meir telling Bloomberg that the outlook for King Copper is “grim-t0-bleak” and miners need to start slashing supply as Chinese demand continues to plummet.
Iron ore faces the same dynamic, as supply rises while demand plummets. The price has fallen from $180 a tonne four years ago to around $50 today. Next year consensus suggests that will fall to $45. A stronger dollar won’t help details, if the US does hike rates next month.
Management has been responding in the same way as every other troubled oil and commodity producer: slashing costs and shelving investment, while maintaining supply to keep the cash flowing. There is only one thing left to slash now: the dividend, which currently yields a crazily fragile 9.22%. How long until that comes crashing down?
Something More Earthy
AIM-listed Rare Earth Minerals (LSE: REM) is also down sharply over the last month, falling 15% from 0.94p to 0.80p. This is more down to a lack of news, rather than bad news. There has been little to inspire investors since its eye-catching deal to supply Tesla Motors with lithium hydroxide from its Sonora field in Mexico, alongside partner Bacanora Minerals.
REM is now focusing on hitting Tesla’s tough two-year performance milestones. If it makes it, investors could hit pay dirt. The recent share price drop could make a decent entry point. Effectively, you are buying blind.
Pretty Poly
Sirius Minerals (LSE: SXX) is another stock in limbo at the moment. The AIM-listed potash miner has clattered over most of the hurdles that lay in the way of winning full approval for its North York Moors potash project, where it hopes to dig the planet’s largest polyhalite mine. But it has a long way to go before it can hit its target of producing 13m tonnes of the fertiliser per year.
Sirius needs to raise as much as £2bn to drive the project forward, a tall order as investors shy away from the commodity sector. But again, this isn’t a metals miner, demand for food is rising and Sirius has already secured polyhalite supply agreements with major agri-business customers. Today it trades at around 18p. Liberum Capital has just set a target price of 38p, suggesting potential upside of around 110p, which is certainly food for thought.
All three commodity stocks come laden with uncertainty but I think future prospects at REM and SXX hold out more hope than BHP Billiton’s troubled recent past.