In 2022, oil and gas stocks have been far and away the standout performers in the FTSE 100. Year-to-date, the Shell (LSE: Shel) share price is up 47%. However, investors still remain wary about buying into Big Oil. Here I’ll explain why I believe that Shell, and the broader industry, will continue to outperform the general market in the years ahead.

Gushing free cash flow

In its Q3 results released today, Shell reported earnings of $9.5bn. That’s over double what it reported in the same period last year. EBITDA (earnings before income tax, depreciation and amortisation) was 60% higher, standing at $21.5bn.

Despite these impressive figures, they’re down slightly on Q2 as oil prices have come off their highs of $120, reached earlier in the year.

Growing dividends and buybacks

One of the primary reasons for investing in Shell is for its dividend. When the pandemic struck, it shocked the market by reducing it by 66%. It’s now seeking to woo investors back by steadily increasing dividends.

In Q3, it announced a dividend per share (DPS) of 25 cents, unchanged from last quarter. In Q4, however, DPS is earmarked to rise 15%. If that dividend were maintained, my calculations are that the stock would provide a yield of 4.2%.

Admittedly, Shell’s dividend yield is hardly headline-grabbing. However, the company continues to buy back its own stock at an increasing rate.

Throughout 2022, it’s expecting to buy back $18.5bn of its own shares. Over the next quarter alone, it has earmarked buybacks totalling $4bn. As a result, total distributions to shareholders will be in excess of 30% of cash flow from operations (CFFO). Given that at the nine-month mark, CFFO stands at $46bn, shareholders are been handsomely rewarded.

Commodities bull market

Over the last year, I’ve written extensively about the oil and gas industry. While many investors have given the sector a wide berth, wary about its medium-term prospects, I continue to remain bullish.

Back in June when oil stocks began selling off, I was in favour of taking a contrarian stance. Since then, the commodities sector has bounced back strongly. So where do I go from here?

Since reaching a peak of $120 in June, the oil price has slowly been declining. However, this decline needs to be set in a wider context.

In a bid to increase supply, the US government has been selling off its strategic petroleum reserves (SPR) at a record rate over the past year. At this rate, the SPR will be zero in 18 months.

Elevated levels of inflation are forcing central banks to push up interest rates. As the world economy heads into a likely deep recession, demand will undoubtedly take a hammering.

Yet despite these two huge macro forces bearing down on it, the oil price continues to hold up well. The reason is that inventories remain extremely tight. It’s the lack of supply coming online in the years ahead that’s the real driver for oil prices to remain elevated.

Levels of capital expenditure across the industry remain depressed. Solving this issue will involve international consensus around energy security. Until addressed, I expect the Shell share price to continue to perform well. That’s why I recently increased my position in Shell.

The post Are we entering a golden era for the Shell share price? appeared first on The Twelfth Magpie.

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Andrew Mackie has positions in Shell plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Iron curtain

The silver lining in the ongoing war for Ferrexpo is that it’s located in central Ukraine. Despite being stationed east of the Dnieper River, Ferrexpo’s facilities haven’t suffered any direct damage from Russian forces, allowing it to continue running its operations.

Having said that, logistical disruptions have impacted the company’s exports. In its most recent operations update, Ferrexpo mentioned that it decreased its commercial production. Ukraine’s Black Sea ports remain closed due to Russian presence in the south. As a result, the FTSE 250 firm has had to divert all its European shipments via Ukraine’s railway network and barging operations.

However, recent Russian airstrikes have damaged Ukraine’s railway and infrastructure in the south west. This has reduced Ferrexpo’s ability to utilise its barging operations to serve its European customers. Nevertheless, the group is in advanced discussions with additional port operators in central Europe for seaborne exports.

As flexible as wrought iron

Due to supply chain disruptions, the iron pellet producer reported a 0.4m tonne increase in iron ore inventories in May. Although the downturn in production hasn’t resonated well with shareholders, I believe this to be a masterclass in operating efficiency, as Ferrexpo is protecting its bottom line from unnecessary costs.

Management have also reiterated that production is expected to resume at peak capacity once damaged infrastructure is reopened, an alternative logistics route is agreed, and Ukraine’s Black Sea ports resume activities.

On track to £3.30?

I have no doubt that Ferrexpo has a long and treacherous road ahead. Analysts have set a price target of £3.30, but the firm faces strong political and economic headwinds. Apart from the ongoing war, a recession in Europe and America is within the realms of possibility. If this were to happen, it would negatively impact industrial production, affecting Ferrexpo’s top line.

On the flip side, there are also a couple of catalysts that could send the FTSE 250 stock flying. Firstly, the firm sees excess demand from Europe after countries imposed sanctions on Russia. Considering Europe accounted for more than half of Ferrexpo’s revenue in 2021, this could be a huge tailwind for Ferrexpo once it resolves its logistical issues. Secondly, iron ore prices could increase if China’s economy continues its recovery. With the group’s Wave 1 Expansion also on hold, its ability to produce 25% more pellets could boost Ferrexpo’s numbers if there’s sufficient demand.

Furthermore, the board recently reinstated its dividend, attracting dividend investors back into the stock. Its shares are going ex-dividend later this week at 6.60p per share. So, this could be an opportunity for me to earn some passive income.

Nonetheless, despite a potential 115% return, the geopolitical implications remain too ambiguous for me to have a long-term position in Ferrexpo. Instead, I’ll be looking to purchase other shares that could benefit my portfolio in this stock market crash.

The post Can this FTSE 250 income stock make me rich? appeared first on The Twelfth Magpie.

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John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Building momentum

As the world’s second largest iron ore producer, Rio Tinto sources iron for the world’s iron and steel industries. The production of steel is essential to maintaining a strong industrial base for construction, particularly buildings. It is for that reason that the Rio Tinto share price is heavily influenced by iron ore prices.

China is the world’s biggest consumer of steel by far, and consequently, is also the Rio’s biggest customer. As a matter of fact, the world’s biggest country contributes to more than half of the company’s sales.

Due to the heavy reliance on China for its revenues, Rio Tinto has seen its share price fluctuate as China comes in and out of lockdowns. Due to the May lockdowns in Beijing and Shanghai, China’s last few Caixin Manufacturing PMI readings have come in below the desired rate of expansion. But with its government recently relaxing restrictions, Rio Tinto shares have rallied over 10% since. Nonetheless, an air of caution surrounds the stock as the uncertain landscape continues. The Chinese government is mass testing in Shanghai again, sparking fears of a new lockdown.

A recessionary top line?

Inflation continuing to run rampant across the world. Both the OECD and the World Bank published a set of gloomy forecasts earlier this week. The former expects global GDP growth to slow sharply this year at 3%, and remain at a similar pace in 2023.

When coupled with China’s zero-Covid policy, the war has set the global economy on a course of slower growth and rising inflation — a situation not seen since the 1970s.

Source: OECD Economic Outlook

The World Bank also expects emerging markets such as China to get hit the most, downgrading growth in emerging markets to 3.4%. Based on these forecasts, I expect the growth in Rio Tinto shares to start tapering off.

A strong core?

Nevertheless, Rio Tinto does have a decent balance sheet to weather a potential global recession. For starters, it has a healthy debt-to-equity ratio of 21.5%. Additionally, it has enough cash and equivalents to cover its current debt. The FTSE 100 firm also boasts an excellent profit margin of over 33% in FY 2021! That being said, its short-term assets do not cover its long-term liabilities. Therefore, if a massive slowdown in free cash flow were to occur, Rio Tinto may struggle to pay off its long-term debt.

Although earnings are expected to decline as a result of a global economic slowdown, things could also very quickly turn around if China abandons its zero-Covid policy. Rio’s reasonable price-to-earnings (P/E) ratio makes the stock a lucrative one for me. But most importantly, its excellent dividend yield of 10% makes it an income stock for me to hold. So, while I expect the Rio Tinto share price to stall, I’ll be buying shares on the dip to generate some passive income over the long-term.

The post Can the Rio Tinto share price keep growing? appeared first on The Twelfth Magpie.

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John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

A market index is essentially a hypothetical portfolio. More popular index funds consist of a country’s top companies or an industry within the stock market. Britain’s main index is the FTSE 100, which consists of the nation’s top 100 companies.

It has managed to stay level since the start of the year, while its counterpart across the Atlantic, the S&P 500, has seen a decline of 10%. The reason behind the two indexes’ different fortunes could be down to their respective constituents.

IPOs don’t like playing FTSE

For the last couple of years, the FTSE 100 has consistently underperformed its US equivalent, at least until recently. The reason for this was a lack of tech and growth companies in the index, as many of these firms opt to list in the US. This is due to the more stringent listing requirements for companies to list on the London Stock Exchange. These include:

• Minimum market capitalisation of £700,000.
• Minimum 25% of shares in public hands.
• Three year trading record required.
• Sponsors needed for new applicants and significant transactions.
• Prior shareholder approval required for significant transactions.

London has historically sought to limit the influence of individual executives, which has deterred many tech companies that are often founder-led. The additional stamp duty to purchase shares also stifles trading volume, presenting another disadvantage for stocks.

No tech, no problem

The FTSE reflects outsized weightings in energy, commodities, and financials. In fact, these three industries account for almost half of the UK’s main index. The S&P, on the other hand, only has 16% of its constituents in these three matured industries.

Due to sky high inflation, the US Federal Reserve has had to hike interest rates. Rising interest rates are normally conducted to slow consumer spending down from higher borrowing costs. So, how has this affected the S&P 500? Given that most technology and growth stocks are valued based on potential future cash flows, a slowdown in overall consumer spending can take a huge chunk off its valuation. This has been evident as tech stocks such as Meta have seen its share price decline 45% from its all-time high.

Simultaneously, FTSE-listed stocks have enjoyed immunity from the weakness of their tech peers. For one, energy stocks such as Shell and BP have enjoyed the tailwinds from rising oil prices. Moreover, high commodity prices in iron ore, copper, and aluminium have also held the index up. Financial stocks, including banks, have also benefited from rising interest rates. This trend is expected to continue in the short to medium term. The outlook for commodities, especially energy and materials, remains solid as the global economy continues to recover from the pandemic.

The million pound question

Is investing in a FTSE 100 fund a good investment for my portfolio then? Well, the British stock market is currently one of the cheapest in the world. It’s trading at a price-to-earnings (P/E) ratio of 14, far lower than the S&P 500’s 16. It also has a projected earnings yield of 13% over the next year, which is forecasted to be twice as much as the S&P.

On that basis, I’m keen to invest in the FTSE 100 for my portfolio through index funds like Vanguard FTSE 100 UCITS ETF (VUKE). Nonetheless, I also see a buying opportunity for the S&P 500, given its incredible track record of producing outstanding returns.

The post Here’s why the FTSE 100 has outperformed the S&P 500 this year appeared first on The Twelfth Magpie.

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John Choong has no position in any of the shares mentioned at the time of writing. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

FTSE 100 constituent BHP Group (LSE: BHP) is a great example. Shares in the world’s largest miner are up a very respectable 25% over the last year. However, if you’d had the courage to buy the stock just over three years ago when the commodity market last dropped like a stone, you’d be looking at a gain of around 200%. 

Despite the less-than-enthusiastic reaction from the market to today’s interim results, I believe those already invested should stay the course.  

Profits down

As a result of “unplanned production outages” at its operations in Australia and Chile (preventing the company from realising the $460m of costs savings it had previously forecast), BHP stated that production is now likely to be “broadly flat” in 2019.

This, coupled with a fall in copper prices and decline in ore quality, led the company to report underlying attributable profit came in at US$3.7bn — 8% lower than that reported for the previous six months. 

Underlying earnings were $10.5bn, down almost 3% from the $10.8bn achieved in the prior trading period. Margins from continuing operations also fell from 55% to 52%. 

Long term focus

BHP’s shares were trading on 12 times expected earnings before markets opened this morning. That’s a little more than top tier peers such as Rio Tinto and Glencore, but reasonable relative to the market as a whole. 

Whether the positive momentum over the last year will continue is hard to say, of course. With a market capitalisation of £95bn, the shares are certainly very unlikely to rocket. As legendary growth investor Jim Slater once remaked, “elephants don’t gallop.“

Nevertheless, there are reasons to remain bullish on BHP’s prospects both in the short and long term in spite of today’s fairly disappointing numbers. 

With regard to the former, CEO Andrew Mackenzie expects a “strong second half” will make up for the difficulties experienced in the first six months and that the company has “a portfolio of attractive development opportunities.“

Longer term, I’m inclined to think that declining stockpiles and the growing popularity of electronic vehicles could cause a very decent rise in the prices for many metals in the coming years, particularly copper. 

There’s also much to be said for BHP’s geographical and resource diversification. Unlike smaller miners, the company produces a wide range of commodities (iron ore, coal, uranium, silver, lead, zinc, uranium, gold, oil and gas) in addition to the aforementioned red metal. That doesn’t protect you from a general downturn, of course, but it does make it decidedly less risky play if you are contemplating getting exposure to the sector.

Having also disposed of its onshore assets to BP over the period and returned $10.4bn to shareholders through a combination of share buybacks and a special dividend last month, BHP should also be of interest to income hunters.

Today’s interim payout may have been kept at 55 cents per share but, with its debt pile down by $1bn (to $9.9bn) since the end of June and expected to “remain at the lower end” of its target range of between $10bn and $15bn, I see no reason why BHP won’t continue rewarding its loyal holders going forward. 

The post Don’t panic! This FTSE 100 dividend stock still looks a solid long-term hold to me appeared first on The Twelfth Magpie.

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• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Investment trusts are great vehicles for making money from the stock market, requiring minimal effort from investors and diversifying your money across multiple assets. For those looking to switch from one investment strategy to another in the New Year, the wide range of trusts can help you to quickly move into new areas as economic and market circumstances change.

Europe

There are many investment themes to look out for in 2018, and one that you have probably heard of on multiple occasions is the revival in European economic growth. 2017 was a euphoric year for most European economies, with the Eurozone’s economic growth rate even outstripping that of the United States. Looking ahead, a number of investment analysts reckon a continued recovery would help domestically exposed stocks in the region.

With this in mind, I believe the Jupiter European Opportunities Trust (LSE: JEO) is a fund to consider for investors looking to get more exposure to European equities. Alexander Darwall, who has managed the fund since November 2000, has proved himself to be an exceptional stock-picker, with the fund regularly delivering returns in excess of its investment trust peers.

Over the past five years, it has delivered a total net asset value (NAV) return of 119%, beating the peer average return of 99% and benchmark FTSE World Europe excluding-UK Index’s performance of 88%.

Fund manager Darwall takes into account economic and business trends to find stocks which offer good prospects for capital growth. Industrials dominate its portfolio, with a 35% sector weighting, and this is followed by consumer services (21.7%) and healthcare (21.7%).

Top holdings include Wirecard (14.7%), Relx (9.9%), Novo Nordisk (9.1%), Carnival (7.4%), and Amadeus IT Group (6.9%).

Mining

Another area worth taking a look at is the mining sector. There’s growing confidence that corporate investment will finally pick up this year, especially following strong global growth and recent US tax changes that create enhanced deductions for capital expenditures. An uptick in corporate investment, along with rising infrastructure spending, should enable commodity prices to make headway in 2018.

The BlackRock World Mining Trust (LSE: BRWM) offers investors a diversified play on the mining sector, with balanced exposure across all major sub-sectors of the mining sector. Although there are a number of diversified large-cap miners listed on London Stock Exchange, this fund also offers exposure to companies such as Canada’s First Quantum Minerals Ltd, Brazilian iron ore miner Vale and a large number of smaller players, giving investors much broader exposure to the market.

Another attraction is that shares in the investment trust trade at a big discount to its NAV. With the shares currently trading at a 14% discount to its NAV, prospective investors have the opportunity to pick up shares in a trust for less than the sum of its parts. They’re able able to buy a pound’s worth of its assets for just 86p, a big discount for a portfolio consisting mainly of some very liquid equity investments.

The post My top 2 ‘growth’ investment trusts for 2018 appeared first on The Twelfth Magpie.

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• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The Mexican miner advised that revenues leapt 31.9% in 2016, to $1.91bn, Fresnillo benefiting from improved metal prices and surging production levels. Total silver output clocked in at 50.3m ounces, up 7.1% year-on-year, while gold production of 935,513 represented a 22.8% increase from 2015.

And Fresnillo expects metal volumes to keep rising in 2017 thanks to higher grades and project ramp-ups. Silver output of 58-61m ounces is currently expected, while gold production of 870,000-900,000 ounces is also estimated.

Furthermore, the precious metals play also continued to make progress on the costs front last year, assisted by a collapse in the Mexican peso versus the US dollar. Adjusted production costs dropped 2.5% in 2016, the average 17.7% drop in the value of the peso versus the North American currency providing a massive boost.

These factors helped pre-tax profits explode at Fresnillo last year, the firm reporting a 238.2% bottom-line surge to $718.2m.

Bravo Rio

But Fresnillo isn’t the only FTSE 100 mining goliath to release robust trading numbers in recent weeks.

Diversified giant Rio Tinto (LSE: RIO) announced this month that sprinting iron ore values had helped underlying earnings leap 12% during 2016, to $5.1bn. The steel-making ingredient is responsible for more a shade over three-quarters of earnings at the digger.

So which is best?

Well, the City expects earnings at both Fresnillo and Rio Tinto to keep rocketing in the medium term at least.

For 2016 the silver specialist is anticipated to print a 36% earnings rise, while Rio Tinto is predicted to enjoy a 47% earnings bump. However, I believe Fresnillo’s earnings outlook is on much sounder footing than that of its diversified peer.

While it is difficult to definitely predict where commodity prices will head in 2017, I believe precious metals are in great shape to gain ground as political and economic turbulence in the US and Europe drives demand for safe-haven assets. Indeed, these fears powered gold above the $1,250 per ounce marker for the first time since early November just this week.

I am far less optimistic concerning the price direction of Rio Tinto’s base metals in 2017 and beyond, however.

Although Chinese exports rose 8% in January, trade data over the past year has largely been patchy, casting concerns over the state of raw materials demand from the manufacturing Goliath looking ahead. And these fears have been fanned by the rising protectionist rhetoric exemplified by new US President Donald Trump.

At the same time, mega producers like Rio Tinto are also turbocharging expansion projects in segments like iron ore to capitalise on recent price strength. But such measures threaten to put values on the back foot again should demand fail to suck up existing oversupply.

So while Rio Tinto’s forward P/E ratio of 9.7 times is far more appealing than Fresnillo’s corresponding multiple of 32.8 times, I reckon the silver star is a much more ‘investible’ commodities pick at present.

The post Fresnillo plc vs Rio Tinto plc: which mining stock will make you the most money? appeared first on The Twelfth Magpie.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Huge potential

SolGold (LSE: SOLG), an Australian gold and copper mining company listed on the alternative investment market (AIM), has seen its share price soar on growing optimism with its Cascabel copper and gold discovery.

There’s mounting evidence that the Cascabel deposit in Ecuador has the potential to rival the scale of the largest existing mines, such as Grasberg in Indonesia and Oyu Tolgoi in Mongolia. Such new discoveries of large copper deposits have become extremely rare in recent years and big miners have had to spend bigger sums on exploration.

But while the potential rewards of investing in a potentially huge copper mining prospect are considerable, SolGold is still at a very early stage. Certainly, the stock has benefited from positive news flow in recent months, but we shouldn’t ignore the possibility of setbacks. Moreover, a lot of the upside seems priced in, after a 1,446% surge in its share price over the past 52-weeks.

Growing free cash flow

Meanwhile, Russian gold miner Highland Gold Mining (LSE: HGM) may have a simpler investment case. The AIM-listed miner already has three operating mines and last year produced over 261,000 ounces of gold. It is generating growing levels of free cash flow, which will no doubt help efforts to develop its pipeline of low-cost projects in the largely untapped Eastern Siberia and Far East regions.

With total costs of $444 per ounce and all-in sustaining costs of $609 per ounce, Highland is on the very low end of the industry cost curve. What’s more, the miner has an ambitious growth strategy — it’s target is to roughly double production to 500,000 annually by 2020, by expanding capacity around existing production clusters and developing a potentially bigger prospect in the remote Chukotka autonomous region in the Russian Far East.

Highland has yet to release its full-year results, but judging from its recent production update and strong first half performance (operating profits more than doubled to $50.4m, from $18.8m H1 2015), I expect a big hike in profits to be announced for FY 2016 due to the increase in output, improved pricing and strict cost control.

Rapid expansion

It’s not just small-cap miners that have seen the value of their shares soar. Shares in KAZ Minerals (LSE: KAZ), the Kazakhstan-based copper miner which was formed out of Kazakhmys, have gained 45% year-to-date.

Kaz Minerals, which had spun-off its high cost copper production assets to focus on a series of low cost growth project, is beginning to deliver the results where it counts. After roughly $3.5bn of investment in its two key open pit copper projects Bozshakol and Aktogay in Kazakhstan, copper production is expanding rapidly — last year, copper production rose by 73% to 140,000 tonnes. What’s more, the company is on track to reach its target in annual production of 300,000 tonnes by 2018.

Shares in Kaz Minerals seem fairly valued, with a forward P/E of 12.0, falling to just 7.2 for 2018. However, the stock will likely disappoint on the dividend front. With net debt of $2.67bn and a capital spending budget of $700m for the next two years, dividends just aren’t a major priority. City analysts seem to agree, with the majority expecting the company to pay nothing to shareholders for at least another two more years.

The post These 3 mining stocks are up 30%+ already this year appeared first on The Twelfth Magpie.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Production of the miner’s four most important commodities, as measured by the underlying EBIT they generated in H1, each showed positive production increases year-on-year.

The fact that higher production volumes were achieved despite a slew of divestments speaks well of management’s ability to wring efficiencies out of the core mines even as they slash capex. Likewise, an across the board increase in average realised prices for key commodities from H1 to H2 2016 is great news as the company focuses on cutting debt.

This focus on improving the health of the balance sheet is critical as at the end of H1, net debt of $11.7bn represented a gearing ratio of 35.4%. The good news is that between the end of the H1 reporting period in June and today there have been divestments totalling at least $1.8bn, the vast majority of which will be used to pay down debt.

While it’s looking as if the slimmed-down Anglo American is in better health with debt falling and core low-cost-of-production assets generating impressive cash flow, the ability of shares to continue soaring stays dependent on commodity prices moving up significantly. Although mooted plans for a major American infrastructure investment programme would help, it’s highly unlikely this would compensate for continued slowing growth in China. With Anglo American shares trading above historical valuations, I’d be wary.

Safe haven?

This is the same problem facing its larger rival, Rio Tinto (LSE: RIO). Shares of the Anglo-Australian giant have doubled over the past year as steadily rising iron ore prices coupled with a sensible level of gearing and hefty dividends have made Rio the must-have safe haven stock in the mining sector.

There’s good reason for this as Rio’s iron ore mines are among the best in the business. Production costs at the company’s massive Pilbara mine are low enough that the iron ore division generated $7.8bn in EBITDA in 2015 even as average received iron ore prices fell from $88 per ton to $50 year-on-year.

With iron ore prices now once again above $80 per ton, Rio’s short-term outlook is very bright. Indeed, cash generation in H1 was strong enough that gearing fell to 23% and the board maintained its commitment to a full-year dividend of no less than ¢110. Even better news is that with free cash flow exceeding expectations and new self-imposed caps on dividends, excess capital is likely to be returned to shareholders through share buybacks in the coming quarters.

Rio Tinto shares are very pricey at 17 times forward earnings, which is enough to give me pause despite world-beating assets, a healthier balance sheet than rivals and shareholder returns ramping up significantly.

The post Can Anglo American plc continue 2016’s 250% rally? appeared first on The Twelfth Magpie.

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• The only FTSE 100 stock I own right now

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Recovery in commodity prices

Much of the reinvigorated investor interest in mining shares has been attributed to the rise in global commodity prices this year. Global supply disruptions, China’s restocking and, more recently, Trump’s election victory have all been bullish factors for the three minerals and metals that account for most of the sector’s profits – coal, iron ore and copper. However, because these tailwinds are — by their nature — short term, there remains huge uncertainty with the longer term price outlook.

With the market still oversupplied and demand from emerging markets slowing, the likelihood of a sustained recovery in commodity prices seems remote. What’s more, higher cost producers which have been forced out by the commodity price rout last year could re-enter the market if the outlook improves. Unless we see more supply disruptions, market fundamentals may only keep prices lower in the longer run.

Debt reduction and lower production costs

But it’s not just the rebound in commodity prices that’s been behind recent gains in these mining shares. Glencore and Anglo American, which were some of the worst performers in 2015, have taken big steps to cut debt and lower unit production costs.

Glencore expects to sell between $4-5bn worth of underperforming assets this year, and has a goal of cutting net debt to between $17-18bn by the end of 2016. That’s around $5bn less than at the end of June this year, and significantly below the peak debt figure of nearly $30bn in 2015.

Anglo American has a net debt target of less than $10bn by the end of the year, which is down from its peak of $13.5bn in mid-2015. It is also on track to deliver production efficiency savings worth $1.6bn this year, which should have a massive impact in boosting its lagging profitability and allow the company to return to positive free cash flow this year.

Bottom line

Although both miners have strengthened their balance sheets and improved their profitability, I’m avoiding their shares. There is just too much uncertainty with commodity prices in the longer run and valuations are unattractive right now, with shares in Anglo American and Glencore currently priced at 14.6 and 36.1 times their respective forward earnings.

Moreover, following their dividend cuts in 2015, neither company is in a strong position to resume dividend payments. Net profits and free cash flows remain well below their pre-2014 levels, and both companies have prioritised debt reduction over returning cash to shareholders.

The post How long can the recovery in these mining shares last? appeared first on The Twelfth Magpie.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.