Investors looking back on the poor returns of the FTSE this year will rightly be pointing a finger squarely in the direction of the mining sector. Battered by the end of the commodity super cycle and finding itself with excess capacity, the FTSE 350 Mining Index is down 50% year-to-date.
Giants such as Rio Tinto Plc (LSE:RIO), BHP Billiton Plc (LSE:BLT) and Glencore Plc (LSE:GLEN) have stolen the headlines all year as their share prices continued to plumb new depths. No investors should be looking for quick returns on these stocks, but are any of them looking like value buys at this time?
More tough times?
Glencore has suffered by far the worst year of the three, with the share price down a full 72% over the past year. While management initially had its head stuck in the sand in regards to commodity prices rebounding, it has acted quickly in the past months to right the ship. The company has wisely ended its dividend and raised $2.5bn through a rights issue. These measures have cauterised the bleeding of cash and along with selling assets, the goal of paring debt from $30bn in June of this year to $18bn-$19bn by the end of 2016 looks like a reasonable possibility.
While these efforts may well end the worst of the share sell-off, there’s little macroeconomic news that suggests a rebound in commodity prices necessary to serve as a catalyst for the shares to begin rising again. Unless the trading division becomes massively more profitable, shares of Glencore will be in for a flat-to-rough 2016.
Over-reliance on iron ore
Rio Tinto is in a stronger position than Glencore, with the company actually increasing its dividend in the first half of the year to yield just shy of 8% at today’s prices. It has also continued with major capex investment, such as expanding its large copper mine in Mongolia on the thesis that copper prices will rebound by the end of the decade due to declining production at older, rival-run mines.
More important to Rio is the price of iron ore, which as long as it continues to trade at around $40 per tonne proves profitable for the company. This is critical as it provides three quarters of the company’s underlying profits. With earnings set to fall once again for the second half of 2015, a significant cut to dividend payouts wouldn’t be wholly unexpected going forward. In my opinion, this over-reliance on one commodity and a probable dividend cut mean that investing in Rio at this point would be unwise.
Dividend cut ahead?
BHP Billiton is much more diversified than Rio, which may not be as much of a selling point now as it was during the boom years. It currently sports a whopping 11.5% yield. But with earnings forecast to fall by nearly half next year, a $5.2bn lawsuit on the way from Brazil over the recent dam failure at an iron ore mine, and credit rating agencies warning BHP that measures will soon need to be taken to shore up the balance sheet, a cut to this astounding dividend is almost a certainty in my opinion.
Glencore, Rio Tinto and BHP Billiton, despite the latter two’s dividends, would be shares I would steer clear of in the coming year until the dust has settled and commodity prices have at least stabilised.