Is the gloom overdone on mining stocks?

As China-related panic spread this week, the mining sector slid. BHP Billiton, Anglo American and Glencore all fell by more than 7% on Monday.

As China-related panic spread this week, the mining sector slid. BHP Billiton, Anglo American and Glencore all fell by more than 7% on Monday, and have each slumped by between 33% and 60% over the past year as base-metal prices have crashed.

China buys 45% of the world's industrial metals. Glencore reported a 56% fall in earnings in the first half. Sliding prices wiped 71% off Rio Tinto's first-half profits. This week Antofagasta saw profits plunge by 49% as it announced more cost-cutting. BHP Billiton impressed the markets by vowing to maintain or grow its dividend despite a 61% drop in operating profits to £8.7bn.

What the commentators said

Cost cuts are a key reason the likes of BHP have been able to keep growing payouts, said John Foley on Breakingviews.com. "But for how long? Growth must come from somewhere." BHP, Anglo and Rio all yield around 8%, far more than the FTSE 100's 4%. That suggests investors are sceptical they can keep it up. Note that Australian miner Fortescue has just cut its payout. The big miners could take on debt or reduce investment, but in the longer term, committing to ever-increasing dividends "makes sense only if prices rise with time".

But that's perfectly plausible, said Julian Jessop and Mark Williams of Capital Economics. In the past year, commodity prices have slumped by almost as much as they did in 2009, when we were in a global recession. Yet the economic data have been nowhere near as bad the pessimism in raw materials is overdone. Surely, agreed Frik Els on Mining.com, the slowdown in China as it shifts from investment to consumption-led growth has been priced in by now.

Most Popular

The MoneyWeek Podcast: Asia, financial repression and the nature of capitalism
Economy

The MoneyWeek Podcast: Asia, financial repression and the nature of capitalism

Russell Napier talks to Merryn about financial repression – or "stealing money from old people slowly" – plus how Asian capitalism is taking over in t…
16 Jul 2021
Three companies that are reaping the rewards of investment
Share tips

Three companies that are reaping the rewards of investment

Professional investor Edward Wielechowski of the Odyssean Investment Trust highlights three stocks that have have invested well – and are able to deal…
19 Jul 2021
The future belongs to emerging markets – three EM stocks to buy now
Share tips

The future belongs to emerging markets – three EM stocks to buy now

Professional investor Carlos von Hardenberg of Mobius Capital Partners picks three of his favourite emerging-market stocks.
5 Jul 2021