My long-running concerns over the impact of a supply glut in the iron ore market are still discouraging me from taking the plunge with high yielder BHP Billiton (LSE: BLT).
Volatility in prices of the steelmaking ingredient has continued as demand from the Chinese construction sector has disappointed. Now, while I am not too concerned over the long-term demand outlook for the Asian powerhouse, I am worried by the prospect of dampening ore values in the years ahead as the world’s largest mining companies hike production at a faster rate than it can be swallowed by the market.
BHP Billiton, for instance, plans to produce up to 249m tonnes of iron ore in the year to June 2018, up from 231m tonnes last year. It joins the likes of Rio Tinto and Vale to name just a couple that are steadily stepping up production.
Reflecting the subsequently poor outlook for profits, the City is expecting it to follow a 30% earnings improvement this year with a 7% decline in fiscal 2019. And this is expected to have severe ramifications for dividends too — a predicted 110-US-cent-per-share payment this year should fall to 100 cents in the following period.
Yields of 5.3% and 4.8% for fiscal 2018 and 2019, like BHP Billiton’s low forward P/E ratio of 12.7 times, are certainly appealing on paper. However, the patchy supply picture for the company’s key commodity is enough to stop me splashing the cash today.
Silver surfer
Those seeking access to a Footsie-quoted mining stock would be better served by ploughing their cash into Fresnillo (LSE: FRES) instead.
Now the gold and silver producer may not be packing the same sort of yields as BHP Billiton, Fresnillo rocking up with readings of 2.1% and 2.2% for 2018 and 2019 respectively.
But the tense geopolitical and economic backcloth means that precious metals are likely to remain well bought, putting Fresnillo in a stronger position than its mining peer to create strong and sustained earnings, and thus dividend, expansion.
Indeed, bullion values remain strong around $1,350 per ounce and are likely to punch fresh peaks for 2018 as the tense diplomatic stand-off surrounding Syria escalates existing fears of a so-called Cold War 2.0.
When you throw fears over Brexit negotiations, the investigation into the Trump administration’s possible links with Russia, and a potential trade war between the US and trading partners like the EU and China into the mix, there appears plenty to keep gold and silver well in demand.
Fresnillo is also lighting a fire under production levels and it pulled a record 58.7m ounces of silver out of the ground in 2017, and plans to raise this to between 67m and 70m ounces this year. City analysts are expecting profits to stomp higher with a 15% advance forecast for 2018 and a 10% rise predicted for next year.
The Mexican miner may be expensive on paper, the firm sporting a forward P/E ratio of 23.8 times. However, the robust market outlook and planned output hikes convince me that Fresnillo is a hot growth stock worthy of such a princely price.