It’s time to get back into mining stocks

Mining stocks took a battering in 2013, but things are looking up this year. Ed Bowsher reveals the best ways to profit.

14-2-20-mining-truck

Mining stocks are looking attractive again

2013 was a rotten year for the mining industry.

The gold price fell by 30%. Many other metals took a battering too.

Several major mining companies wrote down the value of their assets.

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There were even signs that the oft-discussed commodity supercycle' was coming to an end.

But 2014 has been a very different story so far. Things seem to be picking up for the miners. So much so that one of the City's top fund managers is buying mining shares for the first time in ten years.

This manager is buying mining stocks for the first time in a decade

According to Citywire, at a recent investment conference, he said: "Expectations for miners are pretty low and most analysts are forecasting a 20% decline in earnings.Against this backdrop, cash flow and yield looks attractive and there are a lot of new chief executives in place."

In other words, many folk are still writing off miners, but that's why you can get them at attractive valuations.

The point about new bosses is also important. Several mining bosses got the boot last year, because they got carried away by soaring commodity prices during the boom years. As a result, several mining companies spent too much on new mining projects, which could only ever be economic if commodity prices stayed at historically high levels.

Things have changed now that new CEOs have come in. These guys are focused on cutting costs and sweating existing assets as much as possible. Investment in new projects has been slashed. This focus on cutting costs should enable the mining majors to maintain their dividends and hopefully increase them. And as an income manager, that's exactly what Frost is looking for.

Miners have plenty of problems but they're in the price

As soon as the US Federal Reserve began to talk about the taper last May, we saw investors start to move away from riskier assets. After all, as the Fed tapers its money-printing, there is less money sloshing around to pay for speculative mining shares and also to drive up the price of commodities.

Then there's China.

There's been massive investment in infrastructure in China since the millennium, and that's meant huge demand for many commodities, especially iron ore. China's rapid growth and industrialisation were behind the commodity supercycle' the theory that commodity prices would rise dramatically over a 20-year period.

However, while I'm in little doubt that infrastructure spending in China will slow for the rest of this decade, I think you can overplay the fall in demand. Sure, fewer bridges will be built, but we're still going to see plenty of Chinese peasants moving into cities and leading a middle-class lifestyle for the first time. That means plenty of demand for washing machines, computers and, most importantly, cars.

Commodities are used in all of these consumer products they're not just for building bridges. So we may, for example, see increased demand for platinum and palladium which are both used in catalytic converters for engines. (You can read more about palladium in my colleague Dominic Frisby's recent Money Morning on the topic.

On top of that, economies are picking up across the developed world. As Jonathan Eley says in the FT: "New homes in the US consume copper just as new homes in China do."

The best ways to invest in the mining rebound

Glencore Xstrata (LSE: GLEN)

Rio Tinto (LSE: RIO)

Rio is in Frost's top ten holdings and trades on a price/earnings ratio of ten, while paying a dividend of 3.39%. Like many of its peers, Rio had a pretty weak balance sheet until recently, but debts have now been reduced.

My only real worry about Rio is that it's very exposed to just one commodity. Around 80% of its profits are generated by iron ore.

Glencore, by contrast, has a more diversified business. The valuation doesn't look so cheap at first glance. It's on a price/earnings ratio of 15 with a 2.8% yield. The big attraction is that Glencore has a substantial trading business which should allow it to pick up trends ahead of its competitors.

What's more, its copper business appears to be flying. Glencore recently announced a 26% rise in copper production, well ahead of analyst expectations.

If you'd like to invest in mining, but don't want to invest in a single company, you might prefer to invest in a specialist mining fund. My colleague David C Stevenson picked out his three favourite mining funds in MoneyWeek magazine in January.

If you subscribe to MoneyWeek magazine, you'll get three editions of the magazine for free plus access to the whole MoneyWeek archive, including David's article on the mining industry.

Oh, and John's just told me that we've got a group of mining experts coming into the office tonight to give us their views and top tips you can read all about that in next Friday's issue of MoneyWeek.

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Ed has been a private investor since the mid-90s and has worked as a financial journalist since 2000. He's been employed by several investment websites including Citywire, breakingviews and The Motley Fool, where he was UK editor.

 

Ed mainly invests in technology shares, pharmaceuticals and smaller companies. He's also a big fan of investment trusts.

 

Away from work, Ed is a keen theatre goer and loves all things Canadian.

 

Follow Ed on Twitter or Google+.