Is Polymetal a bargain compared to its competitors or are there better options out there? Let’s explore.

Will FTSE 100 mining stocks go higher?

Three Footsie mining stocks on my watchlist have made flying starts to 2022.

The Anglo American (LSE: AAL) share price climbed 34% following a $12bn increase in operating profit and a $1.7bn net debt reduction. Over a third of the miner’s 2021 EBITDA came from platinum group metals. Looking ahead, the company should prove resilient to geopolitical uncertainty. Anglo American, which is up 33% in a year, operates on six continents and has no Russian presence, unlike Polymetal.

Antofagasta (LSE: ANTO) is also racing ahead of the Polymetal share price, rising 22% this year (but down 10% over 12 months). As copper mining is the lifeblood of this Chilean multi-national’s business, shareholders will be encouraged by Goldman Sachs‘ 12-month copper price target of $13,000 per tonne. Antofagasta can build on a robust financial position after earnings per share rocketed by $87.80 last year.

Rio Tinto (LSE: RIO) stock completes the trio — it’s up 25% in 2022, but only up 4% in a year. Iron ore production accounts for almost 78% of its underlying earnings. In 2021, Rio Tinto generated +60% net cash and ordinary dividends per share rose 71%. Moreover, China’s iron ore imports remain stable in 2022, despite its economic slowdown. This is good news for the Rio Tinto share price.

With global interest rates rising, metal prices and mining stocks may fall so all of these shares come with risks. However, I believe the metals bull market could just be beginning as production seems unlikely to meet demand. For me, the outlook remains positive while supply side issues persist.

Will the Polymetal share price go lower?

Polymetal’s focus is precious metals, particularly gold and silver. It has operations in Russia and Kazakhstan. Although it consistently increased production over five years, the share price has been hurt by liquidity troubles caused by sanctions on Russian banks.

In further worrying signs, Polymetal postponed its decision on its 2021 final dividend payment. And Deloitte recently resigned as its auditor, threatening its London Stock Exchange listing.

Arguably, the stock’s substantial decline and a dirt cheap price-to-cash-flow ratio of 1.4 mean the risks it faces are priced in. Nascent plans to separate its Kazakh assets from the rest of the business lifted the Polymetal share price somewhat in recent days.

Nonetheless, I’m pessimistic about Polymetal shares. Headquartered in Cyprus, it avoided direct sanctions like those levied on Roman Abramovich’s Evraz. In a rapidly evolving situation, this could change.

The mining shares I’d buy now

Exposure to metals plays an important role in my diversified portfolio. I’m impressed by all three FTSE 100 stocks on my watchlist. They have strong balance sheets and are collectively spread across different geographies and commodities. I’d divide any spare cash between them.

By contrast, I see potential for further declines in the Polymetal share price. It’s simply too risky for me to buy at present, so I’m looking elsewhere for a solid gold miner.

The post Will FTSE 100 miners outshine the Polymetal share price in 2022? appeared first on The Twelfth Magpie.

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Charlie Carman 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.

What is causing this enormous growth? And should I add the stock to my Stocks and Shares ISA? Let’s take a look.

An explosive UK share

Ferrexpo (LSE:FXPO) is a supplier of high-quality iron ore pellets for the global steel industry. The UK share is currently the third-largest supplier of blast furnace pellets worldwide. But what makes it so unique compared to other iron mining stocks?

There are two aspects of the business that make it stand out to me. Firstly it operates nine mines along a single ore body. This is quite significant as it practically eliminates most of the site discovery expenses mining companies typically have to deal with.

Secondly, the extracted metal is magnetite ore rather than the more common hematite ore. Without going too deep into the realm of chemistry, turning magnetite into iron pellets is an exothermic reaction. Meaning the process releases heat. Therefore, the energy requirement of this reaction is lowered, ultimately reducing the production cost.

Combined, this grants Ferrexpo significant cost-saving advantages over its competitors that lead to higher margins.

The price of iron ore is surging

China recently began issuing a stimulus package to reboot its economy. And since the steel industry is a large driving force of that economy, the demand for iron pellets has skyrocketed. Yet the supply continues to be restricted. And when demand outweighs supply, prices begin to rise.

The price of iron ore is now at the highest point in almost a decade. Needless to say, this is fantastic for Ferrexpo which, despite disruptions from Covid-19, appears to be at full operating capacity. In fact, total pellet production for this UK share actually increased by 7% in 2020. That’s quite impressive, in my opinion, but there are always risks to consider.

Nothing lasts forever

Just as quickly as iron ore prices go up, they can come back down. As the world begins to return to normality, the supply restrictions on iron and other metals will start to ease. If demand starts to fall, the prices of iron ore will fall in a similar fashion.

After all, the market determines metal prices, not the company. Having virtually no pricing power is a weakness all mining stocks share. And it can have a profound impact on the business. Just take a look at what happened between 2011 and 2016. Iron ore prices plummeted from $188/tonne to $41/tonne, and the Ferrexpo share price dropped by nearly 95% alongside it.

A UK share to buy today?

Iron ore prices will undoubtedly stop climbing eventually. However, the world appears to be in the middle of a technological shift. Self-driving cars, electric batteries, renewable energy all of these technologies require a lot of precious metals — including iron – to manufacture.

So, while supply may increase, I believe demand will remain high for many years to come. And with a P/E ratio of 7, Ferrexpo is one cheap UK share I’d consider adding to my portfolio.

The post 1 cheap UK share I’d buy in my Stocks and Shares ISA today appeared first on The Twelfth Magpie.

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Zaven Boyrazian does not own shares in Ferrexpo. 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.

Today’s modest decline, however, suggests that investors see nothing alarming in KCOM’s latest release, helping the stock remain comfortably off 2017’s troughs of 87.5p per share struck last month.

KCOM announced today that revenues slumped 5.1% during the 12 months to March 2017, to £331.3m. This forced pre-tax profits at the firm to shrink 65.6% during the period, to £30.5m.

KCOM has attributed the bottom-line fall to the “continuing decline in legacy business and additional cost of the national fibre network outsource,” after the firm had sold off certain network assets last year.

A poor connection

Despite this adverse result, KCOM elected to raise the full-year dividend to 6p per share from 5.91p in the prior period.

The broadband and telephone giant has undergone vast restructuring in recent times, the business shuttering numerous brands to operate under one fascia concentrating on the Hull and East Yorkshire region. It is also taking steps to develop its Enterprise arm which provides IP-related communications and IT services to business.

Irrespective of these measures however, the City expects KCOM to continue to toil for some time yet. For fiscal 2018 a further 8% earnings decline has been projected, and an additional drop — of 3% — is pencilled-in for the following period.

Against this backcloth the City expects KCOM to annex its progressive dividend policy and keep the dividend locked at 6p this year. While this projection still yields a juicy 6.6%, I reckon investors should give such a figure short shrift.

Not only does this forecast payout outstrip predicted earnings of 5.4p per share, but KCOM is also battling a serious deterioration in the balance sheet. The telecoms giant swung from net funds of £7.4m in 2016 to net debt of £42.4m last year.

With KCOM also warning today that it expects “a further decline in revenues and margins associated with our legacy activities,” I reckon the business is far too risky for dividend chasers right now.

In a hole

Like KCOM, I believe FTSE 100 mining giant BHP Billiton (LSE: BLT) is another big yielder, which investors should steer clear of.

Having been forced to cut the dividend to 30 US cents per share in the last fiscal year, from 124 cents in the year to June 2015, BHP is expected to get onto the front foot again this year with an 81 cent reward. Such a figure yields a chunky 5.4%.

Supported by resurgent iron ore values more recently, City brokers expect earnings at BHP to explode 468% in the period to June 2017. Still, share pickers should bear in mind that this figure is still covered just 1.6 times by predicted earnings, some way below the safety yardstick of two times.

And looking further out, the threat created by swelling oversupply across many commodity markets, allied with patchy demand data from China, threatens to slam raw materials values back into reverse once again. This view is shared by many analysts, a point underlined by forecasts of a 2% bottom-line slide at BHP during fiscal 2018.

I believe the alarming fundamental signals from BHP’s major markets make it a risk too far right now.

The post Are these 5%+ yielders too risky right now? appeared first on The Twelfth Magpie.

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Royston Wild 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.

Indeed, the business software specialist is dealing at a 13% discount to the lofty levels seen last autumn. And I believe this provides a great opportunity for dip buyers to get in on the FTSE 100 star.

Stock pickers took flight in autumn as fears of an intensifying sales slowdown took hold, concerns that were given additional fuel following January’s trading statement for the first fiscal quarter. Sage advised back then that organic sales rose 5.1% during September-December, cooling from the 6.6% advance punched in the corresponding 2015 period.

However, those pressing the panic button could be seen as acting somewhat prematurely. After all, chief financial officer Steve Hare commented in January that “Q1 results are broadly in line with our expectations,” affirming Sage’s view that “the early part of FY17 would start more slowly, with growth accelerating through the year and into FY18.”

The company remains on track to achieve robust full-year revenue growth of 6%, Hare added.

Growth great

City brokers certainly expect sales at Sage to keep strolling higher, and in turn deliver earnings rises of 17% in the year to September 2017 and 9% in fiscal 2018.

While a forward P/E ratio may ride above the FTSE 100 historical average of 15 times, this is still great value as the move to a subscription-based product structure gathers pace and each of the company’s major territories (aside from the US) either performs in line or exceeds forecasts. Indeed, Sage saw subscription sales rocket 31% higher during the first fiscal quarter.

On top of this, I also believe its terrific cash generation makes it one of the Footsie’s hottest growth dividend stocks. The company registered robust free cash flow of £254m last year, facilitating an 8% full-year dividend hike.

And the Square Mile expects this uptrend to continue, with last year’s payout of 14.15p per share anticipated to rise to 15.7p in this fiscal period and to 17.4p in 2018. These projections yield a handy-if-unspectacular 2.4% and 2.6% respectively.

In a hole

Like Sage, Anglo American (LSE: AAL) has been no stranger to extreme share price weakness more recently as fears over the iron ore market have resurfaced.

The mining giant’s share price has slipped 15% from the two-and-a-half-year peaks struck in February. And I reckon more trouble could be in store as Chinese inventories steadily bulge, casting doubts over whether domestic demand is strong enough to suck up the growing amount of seaborne supply.

The City still believes Anglo American should keep its growth recovery rolling with a 32% advance in 2017. But a predicted 26% decline next year underlines the shaky footing the company — nay, the entire mining industry — currently finds itself on as supply/demand balances worsen.

So while Anglo American may appear terrific value on paper, the business boasting a prospective earnings multiple of 6.4 times, I reckon the digger remains an unappealing pick for shrewd investors.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Sage Group. 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.

Petra Diamonds announced that it would issue $600m in senior secured second lien notes due in 2022. The notes would be used to refinance the company’s existing $300m, 8.25% senior secured second lien notes due in 2020, the company advised, as well as to repay all drawn bank facilities and for general corporate purposes.

In addition to this, it announced plans to enter into new bank facilities to provide additional liquidity, which will remain undrawn on closing of the offering of the 2022 notes.

“The group’s new capital structure provides Petra with financial flexibility, with no drawn debt maturities until 2022,” Johan Dippenaar, the firm’s chief executive, commented.

“This represents a further step forward in the next phase of the Company’s development as the eight year capital expenditure programme at the Group’s flagship Finsch and Cullinan mines nears completion,” he added.

Production powers up

Petra is investing huge sums to create new caves at its two gigantic South African mines, and the company announced in January that Finsch’s Block 5 SLC and Cullinan’s C-Cut Phase 1 projects had churned out maiden production in recent months.

The company saw production during the six months to December shoot 24% higher as a result, to 2,015,087 carats.

With production powering higher the City expects Petra Diamonds to recover from two consecutive earnings dips in the period to June 2017, and a 38% bottom-line rise is currently pencilled-in. An extra 84% bounce is predicted for fiscal 2018.

Not only does a forward P/E ratio of 12.2 times for this year look extremely appealing on paper, but a PEG reading below one — at 0.3 — illustrates the digger’s great value relative to its projected growth trajectory.

With diamond prices showing tentative signs of recovery, many investors may well consider Petra a commodities play worth betting on at present.

In a hole

I do not believe the same sort of optimism can be extended to diversified digger BHP Billiton (LSE: BLT) however, the market outlook for its key commodities becoming ever-more worrisome.

BHP warned last month that iron ore prices, for example, are “likely to come under pressure in the short term from moderating Chinese steel demand growth, high port inventories and incremental low cost supply.”

These factors have conspired to drive iron ore values — by far its largest market and responsible for four-tenths of group earnings — to their cheapest since mid-January in recent days. I expect further weakness to transpire as the heady price ascent of last year begins to unwind.

Square Mile brokers share my glass-half-empty take, and expect a projected 534% earnings explosion for the period to June 2017 to represent a mere flash in the pan, an 11% drop predicted for the following fiscal year.

Sure, a forward P/E ratio of 10.8 times at BHP may be cheaper than that of Petra. But I reckon the healthier state of the stones markets makes the latter a superior choice to its iron-producing peer.

The post Which of these commodities stocks is best following latest updates? appeared first on The Twelfth Magpie.

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Royston Wild 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.

So far, DFS has proved resilient since last June’s Brexit vote. The furnishings play announced in February that sales during the six months to January grew at a solid 7%, prompting it to keep its guidance for the full year unchanged.

But retail indicators have become more worrying recently, as Britons buckle down against a backcloth of rising inflation and expectations of toughening economic conditions as we move through 2017.

Sitting uncomfortably

Latest Office of National Statistics numbers, for instance, showed total retail revenues fall 1.4% during the quarter to February, the largest three-month drop since 2010.

And patchy updates from DFS’s competitors in recent months, warning of slowing sales and the likelihood of tough trading conditions persisting, should come as concern to share pickers.

SCS Group advised last week that “trading in February was challenging, largely driven by reduced footfall,” although it added that “we have seen an improvement since the start of March.” And Dunelm Mill warned last month that “market conditions remain challenging” as it also advised of a 1.6% fall in like-for-like sales during July-December.

DFS itself cautioned last month that “in 2017 the retailing of furniture in the UK faces an increased risk of a market slowdown given the uncertain outlook for consumer confidence.” And I believe a similarly cautious statement this week could send investors heading for the hills.

The City expects DFS to suffer a 53% earnings fall in the year to July 2017. And while the number crunchers expect the business to keep the divided locked at 11p per share this year — a figure that yields 4.5% — I believe the dangers associated with the sofa giant far outweigh the potential of such a lucrative reward, and reckon these forecasts could be subject to downgrades as the year progresses.

Commodities cloud

A troubling outlook for commodity prices would also encourage me to cash-in on Rio Tinto (LSE: RIO).

The mining colossus has seen its share price slip to ten-week lows in Monday trading, as President Trump’s failure to get his Obamacare-replacement written into law has cast doubts over the reality of his other proposed policies, and especially the promise of huge infrastructure spending.

However, political developments across The Pond are not the only reason for concern — demand indicators from commodities collector China also remains less than reassuring. Indeed, iron ore prices are currently in free fall, as signs of massive material oversupply in the Asian powerhouse’s ports grow.

These poor fundamentals cast a cloud over City predictions that Rio Tinto will enjoy a 66% earnings uplift in 2017, and thus raise the dividend per share from 170 US cents to 268.5 US cents. I reckon cautious share selectors should give the digger short shrift.

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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.

Current projections suggest Weir will put years of significant earnings weakness to bed with a 35% bounce in 2017. And a further 26% bottom-line build is chalked-in for 2018.

But I believe these forecasts could be in line for significant revisions should Weir advise of further turbulence in its end markets. The business is due to release first-quarter results on Thursday, April 27, a development that could see the share price scuttle lower again.

The Scottish business saw its share price sink to three-month lows in late February after announcing that revenues sank 2% during 2016, to £1.8bn, or 11% at constant currencies. And this forced Weir’s reported pre-tax profit to slump by almost a quarter year-on-year, to £170m.

In brighter news Weir advised that orders ticked 10% higher during October-December, the company noting that “mining and oil and gas markets showed signs of recovery” in the period.

Still, overall conditions remain difficult and Weir predicted “further modest reductions in overall mining capital expenditure in 2017.”

And while North American fossil fuel producers have vowed to increase exploration and production spending should oil and gas prices remain stable, the firm warned that “the pricing environment is expected to remain challenging.” And the market recovery in international markets is expected to be slower, Weir advised.

I do not believe these troubles are currently baked into Weir’s share price, with current growth projections resulting in a P/E ratio of 23.3 times. I believe the company still carries far too much risk for cautious investors.

Money trap?

The prospect of significant price reversals in Anglo American’s (LSE: AAL) key markets — and in particular iron ore — in the months ahead could see the company’s share price experience a sharp pullback, in my opinion.

The Australian Department of Industry, Innovation and Science has predicted that values of the steelmaking material will slump to an average of $51.60 a tonne this year, before falling to $46.70 next year. Iron ore was still trading above $90 this week.

While iron ore imports into China remain strong, with shipments leaping 12% year-on-year in January to 92m tonnes, sizeable port-held stockpiles suggest inbound traffic could moderate in the not-too-distant future.

The number crunchers expect Anglo American to follow last year’s earnings bounce-back with an additional 34% rise in 2017.

However, expectations that Anglo American’s bottom line will drop again in 2018, by 29%, underlines fears of rocketing iron ore supply as well as moderating demand.

Many contrarian investors will no doubt be tempted in by the mining giant’s ultra-low prospective P/E ratio of 7.1 times. But I for one reckon Anglo American’s long-term outlook remains too patchy for shrewd stock pickers to pile-in right now.

The post 2 growth stocks I’d sell in March 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 Weir. We Fools don't all hold the same opinions, but we all 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.

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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.

Buoyant Chinese iron ore demand, allied with optimism surrounding President Trump’s infrastructure pledges, has seen prices of the commodity continue their stellar rise in recent months. But a correction is still widely anticipated as Asian warehouses fill up, and producers of the steelmaking component aggressively ramp up their mining activity the world over.

So while the City expects earnings at Rio Tinto to detonate 42% in 2017, a 23% decline is chalked-in for next year as revenues retrace once more.

Credit where credit is due, Rio Tinto’s huge asset-shedding and cost-cutting scheme has exceeded even the most optimistic of expectations, helping supercharge cash flows and take the sting out of the inevitable dividend cut. Indeed, a full-year 170-US-cent-per-share reward for 2016 smashed the company’s earlier warning that the dividend could fall as low as 110 cents.

However, the prospect of a current commodity price bubble, worsened by signs of massive speculative buying activity in Asia, leaves Rio Tinto’s long-term earnings profile on dangerous footing. And I think investors should subsequently give the stock short shrift despite an attractive forward P/E rating of 11.3 times.

Banking bothers

While still below its pre-referendum levels, shares in Lloyds Banking Group (LSE: LLOY) have continued their steady upward march in recent months as economic indicators have remained broadly resilient.

Indeed, Lloyds is now dealing at levels not seen since the immediate aftermath of June’s vote. And why not? After all, brokers continue to hurriedly upscale their pessimistic financials, and the Bank of England itself has again upped its own assumptions in recent days. The institution now expects expansion of 2% in 2017, up from a prior estimate of 1.4% made just three months ago.

But while the economy may not be on the verge of collapsing, this certainly does not mean earnings are set to detonate at domestic-based banks like Lloyds — rather, the latest upgrade by Threadneedle Street, if proved correct, would still represent nothing more than stagnation for the domestic economy.

Besides, the full impact of Brexit is always likely to be felt in the medium-to-long-term, first as government invokes Article 50 — currently scheduled for March — and gets the withdrawal process going. Then when the UK finally extracts itself, we have a situation that could weigh heavily on economic growth in the decades ahead, particularly should a so-called hard Brexit come to fruition.

The City certainly does not believe the bottom line will thrive in the current environment, and expects a 3% fall in 2017 to worsen to a 6% drop in 2018.

Given Lloyds’ lack of foreign exposure to mitigate these troubles, as well as signs that already-crushing PPI penalties are accelerating again, I reckon the firm carries too much risk at present. And a forward P/E ratio of 9.5 times is a reflection of this rather than representing a sage buying opportunity.

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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.

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.

More reading

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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.