Prices of industrial metals such as iron ore, steel, copper and nickel, as well as some precious metals like platinum are very depressed currently, some in a 12 years low.
This screams opportunity for a value investor, and I am thinking about starting to have a look at mining majors.
It could be WAY too early , though, with the supply glut and chinese demand that are not expected to get better, especially in iron ore, steel and nickel.
What do you guys think ?
Too early. Surpluses are expected to widen through 2H for a lot of the metals as more supply comes online, Chinese support is slowing closures, and I still think there’s further demand slowdown in China that is to occur. Plus a rate increase will strengthen the dollar and hurt commodity prices further. But, that’s just my opinion.
Funny. I was looking at some of the mining majors myself this morning and similar thoughts came to my mind. Many of them are at multi-year lows. BHP Billiton for instance currently yields about 6.6% and it is not far above it’s low from 2008. Coupled with a p/e of under 10 and debt/capital ratio of 26%. Surely, it has to be a good buy with these stats…
^^^^^^
6.6 % ? Hot damn. And yes I agree that it is likely a very good buy (on a LT basis).
Would suck though to buy now and be in the red for the next 2 years…
I´m with Black Swan, for me also too early. Maybe invest a certain %age but keep cash to “cheapen” if the price still declines. And a low P/E is often justified…
BHP seems the most attractive call atm, with nice Free CF yield and a good RoE, and Anglo the worst…
People are probably concerned that those dividends aren’t safe. I’ll say this. I do think BHP looks attractive. They’ve got a great position on the cost curve and a good balance sheet to get through. But I also take the view that the buying opportunitites will be better in 3-6 months.
BHP caught my eye, as well. Great company and all but I think the market is selling it b/c they are not forecasted to generate enough cash to cover that dividend if commodity prices are where they are. So if they are going to have to use existing cash or borrow to support dividends, it’s hard to believe there’s going to be much growth in future dividends. The oil and gas E&P business is not a contributor to free cash flow at all, either.
There may also be concern that BHP may begin to go after some assets now with companies looking to divest at good prices that would either cause them to pause dividends or raise equity. I know if I were running that company I’d be looking to pick up some quality assets or possibly acquire a low cost competitor over the next year.
I agree with some of the points made, there is definitely the chance of them purchasing some low cost assets and that will be putting pressure on the share price. I dont think they will cut or pause dividends though since paying progressive dividends is a cornerstone of managements policy. More likely they will use debt/ and or existing cash to continue paying dividends. Maybe its not the best point to invest now but I think it is one to watch for the comng 3-6 months
See dude, we already saved you 2.5%, stick with us man, we’ll take you places. But on a serious note, I do reaallly like bhp, just not yet.
^ You like BHP-wannabe, Freeport-McMoRan? That company is a total mess right now. I listened to their call yesterday and it’s just one thing after another with them.
I’ve been neck deep in FCX this week on a position we inherited from the last analyst. I’m hoping for copper to recover in the next few weeks and give us a better exit point then we’re getting the f*ck out of dodge. Otherwise my view on commodities (FCX included) is basically wait until fall at the earliest. Most of my view is based on a bearish China view through 2015 and widening supply surplus gaps made worse by possible dollar strengthening with a rate increase. I do like BHP and Rio Tinto and have no major problem with owning them now, but I think there are better prices to be found in a few months.
FCX is a bit of a mess. There are so many things going on right now with them. Negotiations with Indonesian gov’t, oil and gas IPO, asset sales, etc. So many unknowns with this company.
Unfortunately, China and copper prices are not their only problem right now. There’s like half a dozen other material items also up in the air! Running this company would make for a great reality TV show right now.
The industry is certainly been beaten up due to plunging commodity prices. What are people’s thoughts on an ETF such as XME? Smaller yield, although above the SPY, and also at 2008/9 lows.
Well, for me I think the Indonesian issue is mostly resolved, to the degree that I don’t spend significant energy on it. The govt realized they need FCX and that their actions seriously hurt FCI and backpedalled pretty hard, so that seems resolved.
The oil & gas IPO is needed to fund CAPEX on their O&G assets that was originally supposed to be funded through O&G operating cash before prices fell. Honestly, I think a larger IPO sooner would be huge but instead they’re going for $100-200M (~20% of O&G) late in 2015. A chronic problem with these guys has been moving too little too late.
What you’re left with at the core problem is a company that is going through a period of elevated and somehwat necessary CAPEX at a time of low copper pricing (copper drives the majority of their results still, like 60%) with a heavy debt load from the O&G asset acquisitions. Barring some agressive action and copper price recovery they’re likely to lose the IG rating on the fixed income side.
They’re likely to burn >$1B through the remainder of 2015 for a FY cash burn of about $2.7-$3B and 2016 is likely to be very tight for them on a FCF basis as well with low Chinese demand weighing on them.
Same as my other commodity views.
I don’t think FCX’s dealings with Indonesia are settled. Yes, they very likely won’t be nationalized but the terms on a new contract of work are unknown are very material to future earnings. 75% of the questions on the call yesterday were on the contract of work in Indonesia and the company’s responses were far from definitive on how it’s going to work going forward. You should read the transcript if you haven’t already. It was heavily discussed in the Q&A
I agree with your comments on their cash flows and potentially losing IG. We shall see.
I was listening to the call. My impression so far is that the ~$2.5Bish expansion of the Gresik smelter and divestiture of majority stake of PT Freeport should cover their requirements and that the permit is simply pending approval. Beyond that the Papua smelter will be handled by the govt and local affiliates. The further out (beyond 2020) development is in flux but will have a much lower impact and is more of a concern to the model jockeys.
Honestly, barring a major corporate action, I think losing IG is a given. They’re already outside of both the leverage thresholds and OCF-Div / Debt thresholds set for a downgrade by Moody’s in November with essentially zero percent likelihood of rising above those thresholds over the next year. I mean, markets aren’t trading a 7.2% yield on a 21 they think has even a snowballs shot in hell of staying IG.
I’ll tell you how else I know the Indonesian export license is considered a done deal. If the world’s second largest copper producer was facing a potential immenant shutdown of some of its most productive assets, global copper prices wouldn’t look like a random walk to curbside faceplant.
HGA Comdty is the only driver you need to be looking at.