Miners these days are not exactly in vogue in today’s markets and hence a lot of them are undervalued and unloved. The reason for this is that with the recent economic recovery, investors see better stocks to invest in, such as the financial sector or growth/tech sector, whilst shunning away from the less attractive miners. During the financial crisis, investors flocked to safer assets such as gold, pushing the price higher or in turn providing positive sentiment towards commodity based businesses as the value of their product increased. Now though, the world’s economies are recovering and investors have worked up an appetite for risk, the price of gold for example has therefore fallen and miners consequently lose value based on the fact that the material they are producing is losing value. China’s recent economic slowdown has affected commodity prices negatively which has been the main driver in miners going out of favour. China is the biggest influence on commodity prices and this is why you see mining company stock prices rise when better than expected economic data from China is released.
So why should you consider investing in the mining sector? Firstly, sectors go through cyclical spells, as sectors reach the top of their cycle, company valuations become overvalued and as a consequence become less attractive to NEW investors, everyone begins to sell and therefore start looking at what stocks have value and look attractive based on fundamentals. Secondly, as the world economies recover, so does manufacturing and production, which in turn should provide a lift to commodity prices. One issue to keep in mind here is supply and demand, although demand may increase for a particular commodity, if there is a high supply, the price will only be effected marginally. So it is often a good idea to invest in a miner that has exposure to multiple products rather than one as this will reduce your commodity risk. Thirdly, and perhaps the best indication that now is the right time to be buying into the mining sector is the fact that JP Morgan recently gave the sector a double upgrade. After 2 to 3 years of pessimism for the sector, JPM moved from underweight to overweight, pointing to signs of a rebound in Chinese activity, lower costs and recent lacklustre performance from mining shares. “We believe the risk-reward for miners appears better due to a strong cost-cutting drive, a huge past re-pricing in earnings and in performance, especially if near-term data flow picks up,” the bank said. “While the remainder of the second quarter could lack momentum, we believe this is an opportune time to build exposure ahead of expected outperformance in the second half,” JP Morgan analyst Fraser Jamieson said.
We at ValueTheMarkets believe that there is some excellent value in the mining sector at the moment and that now is as good a time as any to start building some exposure if you are looking to buy into the sector. Based on forecast future earnings, Rio Tinto and BHP Billiton are currently the best value out of the big miners with PE’s around 10 or 11 for the next set of results. Anglo American, Glencore Xstrata and Antofagasta are also worth considering with the current financial years forecasts putting them on PE’s of around 12-15. We will focus on an AIM stock in our next article that looks to have great potential to book some profits, so be sure to check back soon for that article.