The phenomenal cash flows of companies in the mining sector have failed to prop up their valuations in recent years. Sky high commodity prices have seen the miners rake in cash, but their share prices remain resolutely in the doldrums. After all, who wants to park their money in a company which continues to drill minerals out of the earth, when the rest of the world is intent on preserving it?

The issue with this altruistic theory is that to create the technologies that will protect the earth - batteries for electric cars, panels for solar farms, turbine components and the like - we need to use the earth’s minerals. And we need the miners to extract them for us.

Rio Tinto (LON:RIO) has image issues on top of those which apply to the entire sector. Drilling into a sacred aboriginal site in Australia was not sensible, nor was the PR horror-show that followed. The company is also struggling with regulatory issues in its newly acquired lithium mine in Argentina, while its exposure to China is worrying amid the country’s continued lockdowns.

Indeed, added to the economic fears that are encircling commodities companies, it’s hardly surprising that Rio’s valuation is languishing at the moment. The company is trading on a forward price to earnings ratio of 5.8x - below its five year average of 9.0x. But the allure of a cheap price tag can be dangerous for investors. Before leaping into value stocks in a troubled market, it's worth making sure the fundamental investment case stacks up.

Ditching principles in the hunt for discounts

Investors' hunt for quality companies at reasonable prices has not been especially fruitful of late. The allure of innovative companies, coupled with a relentless march towards ESG investing has lifted huge swathes of the market, while old-world stocks have remained in the doldrums, regardless of their inherent values. Thus, most of the companies which aren't trading on eye-watering multiples are those whose investment case is clouded by something that could be out of their control. That problem is shown by the output of our quality/value screen which churns out companies which hit the following criteria:

  • QV Score more than 80 - meaning they are among the top 20% of companies on the Stockopedia quality and value scale
  • 5yr average return on capital employed (ROCE) of more than 10%
  • 5yr average operating margin of…

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