Back the miners for profits

Gold miners look good, but prospects are brightening for general miners too, says John Stepek.


Gold miners look good, but prospects are brightening forgeneral miners too, says John Stepek.

Plunging commodity prices have left investors fretting for the financial health of global mining companies, which borrowed heavily during the boom times to pay for rapid expansion and a rising cost base. Between the end of 2008 and the third quarter of 2013 (when debt levels hit their peak), outstanding metal and mining company debt rose from $53bn to nearly $150bn, according to the Bank of America Merrill Lynch US Metals, Mining and Steel index.

Now that hard times have arrived, the bigger players in the sector are aiming to assuage these fears shoring up their balance sheets and reducing their interest payments by buying back their own bonds. As the Financial Times reports, "miners including Barrick Gold and Anglo American completed $2.5bn of bond repurchases" last month. Barrick has used cash from selling off unwanted assets to reduce its debt from $13bn to $10bn, and it aims to pay back a further $2bn this year.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Meanwhile, Anglo one of the worst-performing stocks in the FTSE 100 last year, falling by roughly 75% in 2015 paid $1.7bn to buy back $1.83bn of debt (the bonds were trading below face value, handing the company a $130m profit from the trade).

As outlined in our December cover story by Edward Chancellor, we have been keen on gold miners for a few months. The sector has been in the doldrums and thus under pressure to cut costs and improve efficiency for longer than the mining sector in general.Broad-based options for playing the gold mining sector include the expensive but convenient BlackRock Gold & General Fund, or the less expensive exchange-traded fund, the Market Vectors Gold Miners UCITS ETF (LSE: GDXJ).

However, prospects look brighter for general miners too these efforts to get to grips with the state of balance sheets are just one aspect of a wider move to "shape up" amid the downturn. One of our favourite individual picks in the sector is Rio Tinto (LSE: RIO) see page opposite for more but if you're looking for wider exposure, the BlackRock World Mining Trust (LSE: BRWM) is trading on a discount to net asset value of around 10%. The prospective dividend yield of around 9% still looks rather like wishful thinking.

However, the trust has rebounded sharply since the market lows in January, and with the Federal Reserve still cautious on pushing through further interest rate rises in America, the potential headwind of a stronger dollar seems to be off the cards for now.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.