No happy new year for miners

The raw materials sector has been the worst performer of 2015 on the FTSE. But the coming year does not offer much in the way of good cheer.

Miners at work
Source: Bloomberg

Miners are the hot sector in London at the moment, but sadly for all the wrong reasons. Multi-year lows in share prices, falling commodity prices and surging output, and now dividend cuts, have all conspired to make the sector the most unloved of the year. As we look into 2016, is it time to step in ahead of a bounce?

The answer, unfortunately, is a resounding ‘no’. For a variety of reasons, it looks like the current fundamental story will remain unchanged. Miners find themselves in a deep hole (pun intended) and will keep digging for a long time – in the good times they assumed Chinese demand would go on forever, with the world’s second-largest economy seemingly insatiable in its demand for raw materials. But with GDP growth in China coming off its record highs and services growth overtaking manufacturing, it seems the era of Chinese demand is drawing to a close. 

However, miners still have debts to service, as they pay back loans that were used to fund the massive capacity expansion in recent years. This ensures that production will keep going up, while prices keep falling. The Thomson Reuters Commodity Index is now at levels not seen since the early 2000s, a clear indicator of how the good times have come to an end.

Fundamentally, miners are still overleveraged. The table below shows the current debt levels as a percentage of capital, along with the forward earnings multiple for the next twelve months:

Name Price (p) Debt/cap LF Forward 12M P/E Total % return YTD
Polymetal International 546 59.65% 12.18795935 0.9790103
Vedanta Resources 277 59.62%   -49.02329
Glencore 84.72 51.08% 14.78279609 -69.87642
Anglo American 275.8 40.64% 15.48622765 -75.59973
Rio Tinto 1916.5 33.38% 14.0794175 -32.61051
BHP Billiton 716.4 30.64% 21.19290927 -40.91385
Antofagasta 430 22.25% 25.56448755 -42.18772
Acacia Mining 162.3 6.61% 11.46216117 -35.81497

 

We can see that the likes of Glencore, Anglo American and Rio Tinto are still heavily leveraged (Vedanta and Polymetal are worse, but they have their own issues to deal with). Even with undemanding PE ratios for the likes of Rio and Anglo American, these shares are still not attractive from a value perspective. Until debt levels are cut back dramatically, the sector still looks too vulnerable to a miniature credit crisis.

From my perspective, I would see little to commend miners as a longer-term investment. Investors continue to attempt to find a bottom in the sector, trying to call the turn in the market. This would seem to be folly in my view, with a simple trend-following approach remaining short on the broader index – until the 20-week moving average clears above the 50-week, a bounce is not yet in the offing.

At some point, miners will come back into fashion, as they did in 2009, but that time is not yet now.

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