This has been quite a week for mining stocks, with many of them posting double-digit increases in a matter of days. Why is this? And can the momentum last?
Chile pepper
Chile-focused copper miner Antofagasta (LSE: ANTO) is red hot right now, its share price rising 25% in the last week. The reason is obvious: copper has just enjoyed its biggest rally in 35 years. London Metal Exchange copper prices rallied by a quarter to more than $5,800 a tonne, the highest since July 2015.
This is partly down to president-elect Donald Trump, whose promised $1 trillion infrastructure blitz should raise global demand for metals and other commodities, with both steel and coal rising sharply as well. In fact, the rally began before then, on hopes that Chinese demand was recovering. Taken together, many analysts believe this signals the end of a bear market in metal that has lasted for years.
Seeing red
The red metal’s surge came to an abrupt halt today and Antofagasta is down more than 6% as a result. Investors have to decide whether this is a temporary reversal, and that it’s therefore a buying opportunity. If Trump’s infrastructure plan does progress next year, this will almost certainly prove to have been the case.
Analysts at Macquarie have just boosted their copper forecasts, based on lower supply projections, and Trump’s fiscal stimulus, although it noted that this will not have much impact until 2018. It also warned that Antofagasta has suffered “operational difficulties”, as production last year fell short, and continued to decline. However, it has picked up lately, with its Q3 production report showing copper production up 8.7% on Q2, with performance expected to continue improving over the final quarter of the year.
Copper bottom
Chief executive IvĂĄn Arriagada has worked hard to reduce costs and improve operational efficiencies but the stock isn’t cheap at a forecast valuation of 40 times earnings. After rising 67% in the past six months many investors will feel they are jumping on the bandwagon too late, so it might be worth waiting for a cheaper opportunity to buy… assuming it comes.
If you thought Antofagasta’s growth rate was spectacular, then take a look at fellow mining giant Glencore (LSE: GLEN). Its share price is up 12% in the past six months and 194% over the year. This is a spectacular reversal after the traumas of 2015, although it hasn’t recovered all of last year’s losses, with the share price still 14% lower than two years ago. Commodity stocks have always been cyclical but this kind of volatility is extreme.
Monarch of the GLEN
The same fundamentals that have driven Antofagasta over the past week are also at play with Glencore, which is up 12% in that time. A buoyant China and a fiscal-blitzing US should be good news right across the commodity sector.
Macquarie analysts were also bullish about Glencore, calling it the company that’s most leveraged to the price of copper among the majors. Trading at a forecast valuation of 36 times earnings, it isn’t cheap either, although forecast earnings per share growth of 73% next year suggest this might be a price worth paying.