Shares in large-cap mining companies have seen dramatic swings in sentiment over the past decade. Ten years ago the sector was on the cusp of a massive commodity boom that had investors enthralled. After suffering savage falls in the the financial crisis, they were back at new highs by 2011, but then slipped into a painful five-year decline. After a spell in the wilderness, large-cap mining stocks have been some of the big winners in 2016 - but how do you find the most promising signs of improvement in a notoriously unpredictable sector?

Forecasting trends in the mining sector is not easy because there are so many moving parts that influence prices. In many cases, companies leveraged-up during the commodity boom only to see global demand for metals and minerals slow down drastically in recent years. That forced some of the industry’s biggest names into massive writedowns and slashing costs and dividends. In the UK, stocks like Glencore, Rio Tinto and Anglo American all came under huge pressure as a result.

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FTSE 350 Mining Index (black line) compared to the FTSE 350 index (orange line) - 10 years

The drivers of this 10-year boom and bust are clear with hindsight. But even some of the investment industry’s smartest minds have been wrong-footed by the recent mining upturn. Hedge funds like Lansdowne Partners and Crispin Odey’s Odey Asset Management have been burnt by their short positions in mining stocks. Odey reportedly lost £100m by betting that Anglo American would keep falling in price. In fact, a ‘short squeeze’ in the sector, which has forced short sellers to rush to cover their positions, has been partly credited for pushing prices higher.

Drivers of the mining rebound

The pronounced uptick in the FTSE 350 Mining Index since the start of 2016 maps neatly to modest rises in the price of gold and silver and some other metals over the same period (gold has risen by around 15% this year).

In addition, mining stocks have arguably benefited from turmoil caused by the EU referendum in June and the subsequent decline in the value of sterling. In the aftermath of the referendum, miners were among the big winners as sentiment swung away from stocks sensitive to the UK economy. A major part of their appeal is that, generally, their commodities are priced…

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