Is It Time To Buy Into Mining Stocks?

24th May '13 by WhichInvestmentTrust

6 comments 5201 reads

Buying into unloved sectors at the right time can be a highly profitable strategy. One sector that stands out as being out of favour presently is mining. The FTSE World Index – Mining is down over 18% since the start of the year. So is it best avoided or time to buy in?

Expectations for the mining sector rest on ‘super cycle’ theory, which states we are in a period of robust global growth driven by increasing trade in emerging markets, urbanisation and technological innovation. As a result, demand for raw materials is anticipated to continue growing, benefiting firms that produce them. History affords some precedents. The world has experienced two previous economic super cycles: the second half of the 19th century when innovations such as gas lighting and mechanisation transformed everyday life and the mid-20th century, a period of industrialisation and urbanisation between 1945 and 1973, when the world economy grew at an annual average rate of 5%, spurred by post-war reconstruction and the wide adoption of new technologies.

Proponents of the super cycle theory believe a third and even more powerful multi-decade cycle is underway. Developments in IT and telecommunications are linking economies together in an unprecedented way and emerging nations have unlocked their growth potential. Prudent economic policies have enabled their populations to increasingly engage with the world. Increasing wealth and urbanisation amongst these people has caused a surge in demand for commodities. China has been particularly instrumental to this transformation. Between 2000 and 2010 China’s spending on imports of iron ore increased by 42 times, thermal coal 248 times and copper 16 times.

The first decade of this century was therefore a boom time for virtually all commodity producers and mining firms enjoyed record profits. Yet given slowing growth in China and stagnation in much of the West, investors must now consider whether the super cycle is over or it is merely experiencing a blip. Either way, the profitability of the mining sector is in the spotlight, exacerbated by concerns that firms have used profits unwisely. Many are accused of developing too many additional mines, lacking cost control or being over-optimistic regarding commodity prices. It has all added up to negative sentiment weighing on the sector.

However, there could be better news ahead. Following a slowdown in growth in China there are signs the situation is stabilising. Chinese industrial production data has improved since…

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Cisk

24th May '13

Rob, Blackrock World Mining Trust (LON:BRWM) is a great investment trust - but obviously has been hit by the pullback in mining stocks in recent years. I think this was originally floated as mercury world mining trust some years ago.

The fact that it offers a fantastic yield and the possibility of a healthy rebound in mining stocks makes this a must-have stock in my portfolio.

I'm not concerned by a little gearing - after all that's what investment trusts are for - and at these depressed prices of mining stocks and low interest rates its probably a prudent time to gear up a bit.

Like it or not, china is still massively dependent on coal, and its infrastructure will require steel, iron ore etc for the foreseeable future.

marben100

I think this was originally floated as mercury world mining trust some years ago.

Just for the record, it was Merrill World Mining. ;0)

Only got a few at present, waiting for broker views on the mining majors to turn around. At present, miners' profit forecasts continue to be downgraded.

Marben, it originally started out as mercury, then became merrill, then blackrock ;-)

And I think the price will already turn by the time the brokers review their stance...

esenbel

Hi Rob, interesting thoughts.My eyes were drawn to some comments by Stanley Druckenmiller, at Ira Sohn the other week, on his belief that the super-cycle has ended:

"Commodities tend to go down while stocks go up” they hug the cost curve, which goes down over time. This was interrupted by a once in a lifetime burst of growth in China. Chinese consumption has exploded, and as they built their infrastructure, they were literally 50% of all commodity demand. They also used a huge stimulus in 2008, which crowded out productive investments, but most important mining companies ramped up production as if this growth rate would continue forever." http://www.marketfolly.com/2013/05/stanley-druckenmillers-sohn-conference.html

Naturally as with any hedge fund manager he's talking his own book and I think he is quite down on China, but you get a feel for the argument out there on the other side.

Overall its too tricky a question, interesting but tricky.

WhichInvestmentTrust

25th May '13

I think the point Rob is making and I agree with Esenbel is all of that is already in the price and a number of mining companies are now throwing of cash on lowly valuations.

Although growth in China has come down it is still there. Compound 7% a year for the next few years and you can see there is still considerable support for miners/commodities going forward.

Thanks for all your comments.

Happy to stand corrected on Mercury! Wasn't aware of that even earlier incarnation.

I should clarify my comments on brokers stance. My concern is that brokers still downgrading their earnings forecasts. I.E. they believe that their earlier forecasts were too optimistic. Here is the trend for Bhp Billiton (LON:BLT) (other majors are similar), as shown by Stockpoedia Pro:

Over the last year, earnings expectations have been downgraded massively from nearly $4/share to $2.50/share. 2014 earnings expectations also continue to be downgraded.

Whilst I might miss the bottom, I'm inclined to wait until there is some sign that earnings expectations have bottomed before increasing my exposure to major miners.

Is it time to buy into mining stocks?

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WhichInvestmentTrust

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