​Is the Tide Turning for UK Mining Stocks?

Augustin Eden |

It’s always been a question of balance. After years of massive investment in the commodities business, culminating in three or four of massive over-investment, the global economy is now not growing like many hoped it would. To boot, demand for commodities has been sinking. But such a state of imbalance has been evident for at least a year now. The past 12-months have been so dire for the mining sector that FY 2015 results could not have been anything but disappointing, yet the feeling of disappointment can and has been eased by having the right expectations. If you expect the worst, you’re unlikely to be disappointed. And so it is with basic materials right now.

Given a difficult and volatile past 10 months, what may be surprising to many market watchers is two-fold. First, the extent to which the FTSE100 miners have already recovered from their historic lows (many of those having been made in Jan 2016) – Randgold Resources +78%, Glencore +95%, Anglo American +127% to name but three. Secondly, a recent breakout above May 2015 falling highs and major moving averages on the FTSE 350 Mining index. Fundamentally, we’re seeing little change in terms of the key drivers for commodities - Chinese growth and the strength of the US Dollar - so what’s driving the recent broad based mining sector rally?

The focus on a company’s 12-month outlook has become hugely important. Sure, 2015 profits are down, but for once that’s what everyone expected. Things have, after all, been bad for about a year. Investors are now looking to the future. For example, given the recovery (or re-growth) potential of mining stocks, the fact that hitherto generous dividend policies have been abandoned and job cuts announced may now be seen by growth seekers as welcome cost-cutting measures (the income investors have surely all but departed the sector). In the case of Glencore (GLEN), +100% from last autumn’s lows 66p, a debt reduction plan that’s ahead of schedule has also been welcomed. This is forward-looking stuff. Realization that the hard work is finally being done has seen some aggressive short positions unwound, the extra buying ushering the shares even higher.

Furthermore, Anglo American (AAL) has pleased investors (who chose to ignore a poor set of 2015 numbers) with a decision to streamline operations, reducing its portfolio from nine products to just three – copper, diamonds and platinum. This is addressing the supply/demand imbalance that’s been keeping commodity prices low. Cut back on supply and the price should find support. In Anglo American’s case, its abandonment of iron ore and coal (demand for which is slowing) will have implications for the supply of both, while a concentration on rarer, more valuable elements like diamonds and platinum stand to benefit from growing demand (diamonds in the luxury goods market and platinum in the car industry) from a burgeoning Emerging Markets (EM) middle class as China moves further towards a services and consumption-led economy. Of course, the company now has to sell the things that everyone’s trying to become less exposed to, which will be a challenge.

Not so for Rio Tinto (RIO), which decided to simply slash its investment in iron ore by cutting much of the workforce. While such an approach will save Rio less cash than Anglo might manage, the effect is far more immediate and attainable. For that reason, brokers appear more bullish on Rio Tinto than the other blue chip miners. Across the board though, these are simple measures, simple enough for the least sophisticated of investors to understand: It’s about good old fashioned supply and demand. In a rebalanced commodities market, there’s very little reason to dismiss the regrowth potential in the miners.

Written by Augustin Eden at Accendo Markets



DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
RIO Rio Tinto Plc 60.43 -1.08 -1.76 2,668,377 Trade
AAL American Airlines Group Inc. 34.22 0.61 1.81 6,353,634 Trade

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