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.

Recommended

The Burberry share price looks like a good bet
Trading

The Burberry share price looks like a good bet

The Burberry share price could be on the verge of a major upswing as the firm’s profits return to growth.
5 Oct 2022
What’s happened to Credit Suisse stock?
Bank stocks

What’s happened to Credit Suisse stock?

Credit Suisse stock has slumped on rumours that the bank is in trouble. Is there any truth in this speculation?
5 Oct 2022
Markets may have bounced, but this is not the end of the bear market
Stockmarkets

Markets may have bounced, but this is not the end of the bear market

Stocks are back on the rise, commodities and precious metals prices are up – even the pound has rebounded. But none of this is typical of bull markets…
5 Oct 2022
3 emerging market dividend stocks to buy now
Share tips

3 emerging market dividend stocks to buy now

Professional investor Omar Negyal of the JPMorgan Global Emerging Markets Income Trust picks three of his favourite emerging market stocks for income …
4 Oct 2022

Most Popular

Should you take a 25% tax-free pension lump sum in instalments?
Pensions

Should you take a 25% tax-free pension lump sum in instalments?

Taking out a 25% tax-free lump sum sounds appealing but it might not be the best way to manage your pension
30 Sep 2022
October’s Premium Bonds: how to check if you are a winner
Savings

October’s Premium Bonds: how to check if you are a winner

NS&I has added almost 110,000 more prizes to October’s Premium Bond draw – are you a winner?
4 Oct 2022
Section 75 refunds: protection for your credit card purchases
Credit cards

Section 75 refunds: protection for your credit card purchases

Under Section 75 of the Consumer Credit Act 1974, your credit card can give you extra protection when the goods or services you buy fall short of your…
23 Sep 2022