2019 hasn’t been a good year for global growth, and it is expected to end as the worst one since the financial-meltdown-driven recession of 2008–09. Periods of muted growth aren’t the best times for cyclical sectors, case in point being mining. But, exceptions prove the rule, yes?
Last year around this time, I wrote about two FTSE 100 mining companies, which sure are making the point. The first of these was multi-commodity miner Anglo American (LSE: AAL) when the FTSE 100 index was showing pretty uninspired sideways movements. And the second was Anglo-Australian miner Rio Tinto (LSE: RIO) when it was seeing muted price levels.
Cut back to today, and share prices of both have seen a healthy rise and no one’s more disappointed than me for dragging my feet on making these investments! AAL has performed better with a 28% increase, though RIO isn’t bad at all either with a 20% increase from the time I wrote about it to the last close. The key question now is – can they continue to perform in 2020 or are we to expect a more muted trend ahead?
Risks ahead for AAL
As far as AAL is concerned, I think there are some risk factors that need to be considered carefully. It’s true that there’s little to fault in its earnings. However, the latest trading update shows that production is buoyed mostly by coal, with a decline in all other categories.
I want to draw attention to the production of diamonds in particular, which is the largest revenue source by product (20%). According to the latest update, its production fell, and the release also notes “macroeconomic uncertainty” as impacting demand. The company also mentioned in its last annual report that synthetic diamonds are a risk to natural ones.
While it believes that it can manage the risk, continued macro sluggishness and the latest production update doesn’t give me confidence. Iron ore, the biggest contributor to earnings in the first half of the year, offers a better picture which makes me somewhat optimistic about AAL’s overall financial results going forward. Still, I’ll wait for another earnings update before making a call on whether to invest in it or not for 2020.
Lucky RIO
I’m more positive on RIO, which recently had a “eureka moment” or what would more often be called a blind stroke of luck when it found lithium while looking for gold. I haven’t come across any numbers on the size of the finds, but with electric vehicles expected to become more mainstream in the coming decades, the finds will hold RIO in good stead if they are sizeable. Its past financial performance, like that of AAL, can’t be faulted. Its iron ore operations too are promising and are also the largest contributor to revenue, accounting for almost half.
For 2020, RIO is better placed in my view though I’m by no means writing off AAL either.