Digging for high yields among the market's biggest mining stocks

Thursday, Apr 25 2019 by
Digging for high yields among the markets biggest mining stocks

Shares in a number of large and mid-cap mining stocks have been on a strong run over the past two years. In fact, we’ve seen several of them break-out sharply in the first quarter of 2019. And according to the latest figures, it’s not just price growth we’re seeing from the miners - it’s impressive dividend growth too. So is this a sector we should all be taking more seriously?

Not so fast. Mining of course is one of those highly cyclical sectors that has a habit of catching us unaware. As recently as 2015 and 2016 the whole sector fell out of favour and drastically underperformed the market. But while holding those stocks might have felt daft at the time, they’ve come racing back in the years since.

You can see this in a 10-year chart which shows the wide drawdown of the FTSE 350 mining index (blue line - consisting of 12 large-cap stocks) against the main FTSE 350 index (green line). It looks pretty brutal...


…but then over the past two years there’s clear outperformance by the big mining stocks against the index:


The causes of these swings are varied. Share prices are naturally sensitive to commodity prices, and the prices of products like coal and metals are driven by global supply and demand. Then you have to consider how individual companies are being run. Many were guilty of over-leveraging and over-expanding in the mining boom early this century. When supply fell away and uncertainty swept in, it took years to unwind those mistakes.

A recovering sector

What we’ve seen over the past few years is the end of that cyclical swing. Some of the largest companies have stripped back their businesses. Assets have been sold, balance sheets have been strengthened and commodity prices have (in some cases) been rising.

The first signs of this kind of move come when deep value investors start smiling. After years of being out of favour, mining stocks can move very rapidly and it’s the brave long-term holders that benefit first. Indeed, the moves in very large mining stocks can be swift and spectacular.

Take Anglo American. Just two years ago, the diamonds and precious metals group was worth around £7 billion. Its shares had actually been…

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EVRAZ plc is a steel, mining and vanadium business with operations in the Russian Federation, Ukraine, the United States, Canada, the Czech Republic, Italy, Kazakhstan and South Africa. The Company's principal activities include manufacturing steel and steel products; iron ore mining and enrichment; coal mining; manufacturing vanadium products, and trading operations and logistics. Its segments include Steel; Steel, North America; Coal, and Other Operations. The Steel segment is engaged in the production of steel and related products at all mills except for those located in North America. The Steel, North America segment is engaged in the production of steel and related products in the United States and Canada. The Coal segment includes coal mining and enrichment. Other Operations include energy-generating companies, shipping and railway transportation companies. more »

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BHP Group PLC, formerly BHP Billiton Plc, is a global resources company. The Company is a producer of various commodities, including iron ore, metallurgical coal, copper and uranium. Its segments include Petroleum, Copper, Iron Ore and Coal. The Petroleum segment is engaged in the exploration, development and production of oil and gas. The Copper segment is engaged in mining of copper, silver, lead, zinc, molybdenum, uranium and gold. The Iron Ore segment is engaged in mining of iron ore. The Coal segment is engaged in mining of metallurgical coal and thermal (energy) coal. Its businesses include Minerals Australia, Minerals Americas, Petroleum and Marketing. It extracts and processes minerals, oil and gas from its production operations located primarily in Australia and the Americas. It manages product distribution through its global logistics chain, including freight and pipeline transportation. more »

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Rio Tinto plc is a mining and metals company. The Company's business is finding, mining and processing mineral resources. The Company's segments include Iron Ore, Aluminium, Copper & Diamonds, Energy & Minerals and Other Operations. The Company operates an iron ore business, supplying the global seaborne iron ore trade. Its Iron Ore product operations are located in the Pilbara region of Western Australia. The Aluminium business includes bauxite mines, alumina refineries and aluminum smelters. Its bauxite mines are located in Australia, Brazil and Guinea. The Copper & Diamonds segment has managed operations in Australia, Canada, Mongolia and the United States, and non-managed operations in Chile and Indonesia. The Energy & Minerals segment consists of mining, refining and marketing operations in over 10 countries, across six sectors: borates, coal, iron ore concentrate and pellets, salt, titanium dioxide and uranium. more »

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  Is LON:EVR fundamentally strong or weak? Find out More »

5 Comments on this Article show/hide all

Chrisgrice01 28th Apr 1 of 5

Hi Ben,
This article is really informative,but please remember that the main purchaser of metals,China, is starting to slow its demand and this will make the mining sector contract again in the next few years.

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donald pond 29th Apr 2 of 5

I'd be wary of ever forecasting Chinese demand. Firstly, all of their figures are frankly unreliable. Secondly, the belt and roads initiative is a huge project and involves building infrastructure globally. That is about leveraging Chinese influence and manufacturing expertise: the Chinese have built more roads, ports, trainlines, power stations etc than anybody else over the last 20 years, and now if you want them in your country it is quicker and cheaper to get the Chinese to fund and build them. I don't know where that shows up in terms of global demand. But I would hesitate to think that the price of copper or iron is about to drop because of Chinese domestic demand as it is more complex than that.

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LongValue 29th Apr 3 of 5

For those looking for a conservatively managed mining company focused on base metals, Central Asia Metals (LON:CAML) could well justify further investigation. Its operations in Kazakhstan and North Macedonia cover Copper, Zinc and Lead. Very importantly, it's a low-cost producer of both its mains metals: Copper and Zinc (With Lead and some Silver as a by-product).

Having raised some US$60 million in 2010, it went on to construct its Copper leaching plant in Kazakhstan from scratch (And no, it did not return to the market for repeated fundraises). Since listing in 2010 it has returned some US$160 million in dividends and share buybacks to shareholders.

It expanded its business through the acquisition of the SASA Zinc/Lead mining operations in North Macedonia in 2017 and took on some US$187 million of debt. A substantial amount of which has already been paid back. In 2018, it repaid US$38.5 million and refinanced the remaining debt on more favourable terms.

Its basic model is to return between 30% and 50% of free cash flow to investors via dividends. But investors should be aware that it does not have a progressive dividend policy. Returns are largely linked to its profitability which is why it has set itself up as a low-cost producer. If commodity prices collapse then so too will dividends.

In terms of growth, its organic prospects are limited. Growth will almost certainly come through acquisition and that is likely to be financed by debt. It took around four years of searching to find a suitable match in SASA. And last year alone it seriously looked at over 20 potential acquisitions but none met its exacting criteria so rapid expansion does not appear to be on the cards. But, in my view, it's a well-managed business with a degree of protection. It produces three main metals, operates in two jurisdictions and is a low-cost producer in the markets in which it's based. While it looks for opportunities to grow, it's paying down its borrowings. And it offers a generous yield.

By the way, I am invested in the company.

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Steves cups 30th Apr 4 of 5

Or if you don't want he miner itself but want a good yield how about Anglo Pacific (LON:APF) ?

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Anthony127 1st May 5 of 5

I think that miners tend to do well later in the economic cycle and that appears to be where we are now. A lot depends on the impact of the recent Chinese stimulus and the potential US/China trade deal.

The recent drop in mortgage rates in the US may help increase demand for Copper and other materials via a revitalized housing market. This is certainly an area for consideration and I like the look of the dividend yields and their fairly healthy covers.

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