Making the most of declining junior miners
Miners are underperforming gold despite getting support from the stock market.
Mining stocks have been so badly beaten down that now is the time to consider jumping in, or back in, according to analysts at JP Morgan Cazenove.
The investment bank has moved its position on the mining sector to neutral from underweight and is urging investors not to short mining stocks, reported Barbara Kollmeyer for the Wall Street Journal Monday.
Looking at the sector, which is down 20% in 2013 alone, analysts at the bank cited the following reasons for their change of heart:
Miners have undershot metals prices, which are currently at double the fourth-quarter 2008 levels.
Cost bases are unfavorable, capital discipline is still a problem, but miners are starting to cut capital expenditure aggressively.
Free cashflow yield could turn positive again in 2014. While J.P. Morgan remains skeptical about that, its analysts say “the market could give the sector the benefit of the doubt for a while.”
Sector valuations are more attractive — the relative price/book ratio is back to 2009 lows.
The Dollar Index has rolled over recently, closing a gap with metals prices. Unless the dollar index rallies sharply, miners could see a short-term bounce.
Chinese commodity import volumes seem to have bottomed out, suggesting a moderate recovery in metals demand. Mining-equipment sales have inched up.
Chinese commodity inventories are off recent highs.
The team of analysts is especially upbeat about Rio Tinto for its “capital discipline and an attractive dividend yield of 4%,” and Glencore Xstrata “for underappreciated long-term free-cashflow-improvement stories.”
Unfortunately for mining services companies, J.P. Morgan has left them behind in this new sector outlook. The logic is easy enough to follow: with such drastic cost cutting from the miners, the services companies are likely in for a very dry spell indeed.
