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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