After a disastrous 2015, mining stocks are enjoying a shock comeback with some company share prices almost doubling in the past month. This extraordinary performance is luring many investors back into the sector, but be warned – the recovery may not last and this is a volatile sector. Here are 10 factors to consider:
1. Mining stocks are volatile
The Chinese growth miracle fuelled a commodity “supercycle” as miners raced to supply it with industrial metals and minerals, but as China slows so has the supercycle. Most of the world’s biggest mining companies are listed on the UK’s FTSE 100 and last year two of them, Anglo American and Glencore, were the worst performers on the index, both falling around 75 per cent as revenues slumped and they scrapped their dividends. The big miners have fought back in recent weeks as investors decided the sell-off had been overdone. On February 4, labelled Super Thursday, Anglo American soared almost 20 per cent in a single day. It is now up 90 per cent in the past month alone, while Glencore has rallied more than 70 per cent.
2. It is all about China
China is the world’s biggest consumer of metals, consuming half of all global iron ore output, for example. So if Chinese GDP slumps or manufacturing output dips, mining stocks also fall. If the Chinese authorities announce further stimulus, share prices leap.
3. It is about the dollar as well
Commodities are priced in dollars, so prices can be affected by sudden changes in the value of the greenback. A stronger dollar hits commodities as they become more expensive for other currency holders. Many analysts attributed Super Thursday to sudden weakness in the dollar, as poor data forced markets to downgrade assumptions about future US rate hikes.
4. Mining companies are fighting back
Mining stocks are notoriously cyclical. They invested heavily in the boom times, but now find themselves deep in debt as prices retreat. Glencore, for example has net debt of $26 billion. Miners have been slashing costs, selling non-core assets and undergoing painful restructuring to compete again. This has made them leaner and meaner, and investors could reap the rewards if commodity prices start rising again.
5. You cannot time this market
Even the most successful investors cannot consistently call future stock market movements. Many highly-paid brokers were tipping BHP Billiton and Rio Tinto as “buys” in the teeth of last year’s commodity rout.
6. Mining stocks are easy to buy
Most of the big mining stocks are listed in London, so you can trade them cheaply and easily using an online stockbroker. Top London-listed names include Anglo American, Antofagasta, BHP Billiton, Glencore, Lonmin, Rio Tinto and Vedanta Resources. Alternatively, you could consider gold and silver miners such as Centamin, Fresnillo and Randgold Resources. Precious metals have performed well lately but can also be volatile.
8. You can spread the risk with a mutual fund
Several big-name mutual asset managers offer specialist mining funds, notably Baring Global Mining, BlackRock Gold & General, BlackRock World Mining and JPM Natural Resources. While these spread the risks they can still be volatile: BlackRock World Mining is up 30 per cent over the past three months, but is still down 62 per cent over five years, according to Trustnet.com. Alternatively, you could consider one of a wide range of exchange traded funds (ETFs), such as iShares MSCI Global Select Metals & Mining Producers or SSGA SPDR S&P Metals and Mining.
9. The rebound may be over for now
Don’t expect commodity stocks to rise another 90 per cent this month. After the recent rebound, they aren’t as cheap as they were. Miners continue to cut dividends, with BHP Billiton and Rio Tinto both slashing theirs lately. There is also a commodity glut as the big companies ramp up production to drive out smaller rivals.
10. Don’t invest what you cannot afford to lose
Investing in individual company stocks is always risky, and this sector is one of the most volatile of all. If your chosen miner slumps or goes bust, you could lose most or all your money. But make the right call and you could end up mining a very rich seam.
pf@thenational.ae
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