The commodity sector is hurting right now. Chinese stimulus is wearing off, Donald Trump’s infrastructure blitz is yet to happen, and mining companies are feeling the pain. Do the following two FTSE 250-listed companies face a brutal squeeze?
Kaz Minerals
Kazakhstan-focused copper miner Kaz Minerals (LSE: KAZ) enjoyed a blistering second half of 2016, its share price soaring from 116p to 602p by February this year, lifting its valuation to £2.7bn. Today the share price idles at 445p, its market cap at £1.96bn. Ah well, no company can maintain that breakneck growth rate for long. Forces beyond its control also played a major part.
Every mining stock is at the mercy of commodity prices, or rather, China. The 2015 sector blow-off was triggered by diminished Chinese appetite for metals, while the astonishing 2016 recovery was driven by a fresh bout of red stimulus, combined with the ‘Trump trade’, as investors anticipated his $1trn infrastructure blitz.
Entry signs
The excitement is fading as Chinese manufacturing slows, US interest rate hike speculation accelerates, and copper posts its biggest two-day loss since 2015. Kaz Minerals is down 10% in the last week alone. Worse could follow, but that could trigger an interesting entry point into one of the world’s lowest-cost copper producers.
The business is running smoothly, with the firm on track to meet 2017 production guidance for all metals, including gold, silver and zinc as well as copper. Its valuation is undemanding at 14.23 times earnings. Revenues are set to more than double from $766m in 2016 to $1.286bn this year, then rise again to $1.62bn in 2018. Earnings per share (EPS) are forecast to grow a massive 79% this year, and 39% in 2018. This gives the company a nice cushion in case copper prices do rub off. I spy a tempting entry point ahead.
Global spread
India-focused Vedanta Resources (LSE: VED) is a globally diversified £1.66bn FTSE 250 miner with operations across four continents and interests in zinc, lead, silver, copper, iron ore, aluminium, power and oil & gas. Naturally, this leaves it just as exposed to China as every other commodity company. It is also exposed to the oil price, which continues to fall in defiance of OPEC production cuts, with Brent crude dipping below $47 last night.
In a similar pattern to Kaz Minerals, Vedanta soared between last summer and this February, but has trailed far more sharply since then. Today’s price of 609p is down almost half since its 52-week high of 1,112p. That makes a mockery of my headline: the stock has already been crushed by the sector sell-off. All investors prize diversification, but it hasn’t helped in this instance.
Buying time
That’s commodities for you. The first thing I learned is that they are intensely cyclical. The time to invest is when they are down in the dumps, rather than riding high. Currently, Vedanta trades at a forecast valuation of just 6.6 times earnings, so there you go.
Revenues fell to £9.28bn in the year to 31 March 2017, but they are forecast to hit £11bn this year, then £11.43bn. EPS are expected to rise a whopping 198%, then slow to a more sensible 8%. Recent share price falls will have hurt, but stop complaining and admire the buying opportunity.