Investors have been quick to dump the commodity sector since the news first broke of China’s impending slowdown. And while many may have been right to scale back their exposure, there has been little to no let up in the pace at which investors have dumped shares in mining companies over the last 24 months.
This begs the question — is the game really up for companies like Glencore (LSE: GLEN), Rio Tinto (LSE: RIO) and BHP Billiton (LSE: BLT) and Anglo American (LSE: AAL)?
My own view is that the answer to this question depends almost entirely upon the time-frame of the investor in question.
While the bleak short term outlook for these companies will probably rule them out for some investors, it’s possible that for those who are able to adopt a longer term view the miners could still have something to offer. This is because despite the current China induced panic among investors the longer term outlook for infrastructure investment and therefore, demand, remains relatively healthy in both the east and the west.
Some research, by Oxford Economics and PWC, even suggests that the total annual value of this investment could reach as high as $9 trillion by 2025, which is almost double the current rate.
With reports like these in hand it becomes difficult not to question whether the severity of the ongoing rout across the commodity space has really been the result of a warranted reassessment by investors, or if it is just short termism by the market.
I suspect that there is an element of both involved. However, with share prices and valuations across much of the sector now approaching financial crisis lows, I see an opportunity for those with the requisite time-frames.
Looking at the details
Looking at price/earnings (P/E) and price/tangible net asset value (TNAV) multiples, it would appear at first glance that Anglo American is the cheaper of the diversified miners, with a forward earnings multiple of just 12.24x and a discount to NAV of 0.31 (Price/TNAV: 0.69x).
This compares well against both the mining sector and the similarly beleaguered oil and gas sector (14.5x). However, it is possible that this lower valuation reflects concerns over the greater potential for a dividend cut at the group later in the year.
However, relatively speaking, Rio Tinto and BHP Billiton are also cheap — despite that both trade at a premium to their last reported NAV (1.3X). Forward earnings multiples are 13.3x and 16.8x respectively.
Glencore also trades at a discount to NAV, with a price/TNAV multiple of 0.69x. Although the group’s forward P/E multiple sits out at 20.8x times its 2015 earnings per share, shareholders have recently forced management to take action on the balance sheet, which could mean a number of asset sales and possibly even a rights issue later in the year.
This will reduce both leverage and the overall risk profile of the business, which may then help to stabilise the share price over the coming months.
Summing up…
On balance, if this were a talent competition, then I would have to say that BHP’s lower average cost of production and greater product diversification would probably win the day for me.
However, each of the miners mentioned are reasonably valued and if commodity markets were to stabilise over the coming quarters, they could soon come back into favour with investors.
