Why Is The Recovery At Rio Tinto plc, BHP Billiton plc And Antofagasta plc Faltering?

Rio Tinto plc (LON: RIO), BHP Billiton plc (LON: BLT) and Antofagasta plc (LON: ANTO) are heading South again.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

After a long slump, investors in the FTSE 100’s mining sector were finally starting to breathe a sigh of relief with share prices starting to pick up. From December’s lows, Rio Tinto (LSE: RIO)(NYSE: RIO.US) had gained 23% by late February. But since then the price has given up 12% to today’s 2,864p, despite a mini-rally in May.

The picture is similar at BHP Billiton (LSE: BLT)(NYSE: BBL.US), whose shares put on 29% only to fall back by 11% over a very similar timescale. Antofagasta (LSE: ANTO) hit its low in January and then regained 16% by late April, but it’s another that’s turned tail again and has since fallen 8% to 748p.

Results looking good

Results have been looking good, with Rio reporting a solid rise in iron ore production in its first quarter. BHP showed strong rises in copper and iron in its Q3 update, and despite some disruptions in its first quarter, Antofagasta lifted its copper production.

But despite that, forecasts have been scaled back a little over the past month, with EPS predictions for this year and next being cut for all three companies. Today, Rio Tinto is the only one of the trio favoured with a bullish Buy stance by the City’s analysts.

Why the downturn?

If we’re wondering why the reversal, we probably need to shift our eyes to the East. China is a massive consumer of raw materials these days, and its economy is perhaps the biggest driving force for the mining sector. It’s true that the latest manufacturing data from China came in slightly ahead of forecasts, but there’s growing concern over the country’s bubbling stock market, its rising property prices, and its overheating debt levsls.

While our own FTSE 100 has managed just a 1% gain over the past 12 months, China’s CSI300 index has doubled! The Shenzen exchange has an average P/E of more than 60, while others are even higher, and high-tech stocks are on ratings we haven’t seen in the West since the days of the dot com boom.

The Chinese bubble is going to burst, and when it does it will surely hit the government’s strategy of shifting more of its economy to private hands rather than being led by government projects. And that’s going to hurt demand for commodities.

Which is best?

Looking at these three miners, Antofagasta’s forward P/E of over 20 with a dividend yield of less than 2% makes it look vulnerable. BHP isn’t much better on the P/E front with a figure of 19 penciled in for 2016, and it’s 6% dividend yield expected that year would not be covered by earnings.

Rio Tinto looks the best of the three to me, with a forward P/E ratio of 16 this year dropping to 13 on 2016 forecasts, and its predicted dividends of close to 5.5% appear adequately covered.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft 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.

More on Investing Articles

Investing Articles

5 steps to start buying shares with under £500

Learn how this writer would start buying shares with a few hundred pounds in a handful of steps, if he…

Read more »

Young happy white woman loading groceries into the back of her car
Investing Articles

The FTSE 100 offers some great bargains. Is this one?

Our writer digs into one FTSE 100 share that has had a rough 2024 to date, ahead of its interim…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

£9,000 of savings? Here’s my 3-step approach to aim for £1,794 in passive income

Christopher Ruane walks through the practical steps he would take to try and turn £9,000 into a sizeable passive income…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’d buy 29,412 shares of this UK dividend stock for £150 a month in passive income

Insiders have been buying this dividend stock, which offers an 8.5% yield. Roland Head explains why he’d choose the shares…

Read more »

Red briefcase with the words Budget HM Treasury embossed in gold
Investing Articles

Could the new UK budget spell growth for these 6 FTSE stocks? I think so!

Mark David Hartley considers six UK stocks that could enjoy growth off the back of new measures announced in the…

Read more »

Investing Articles

With a 6.6% yield, is now the right time to add this income stock to my ISA?

Our writer’s looking to boost his Stocks and Shares ISA. With this in mind, he’s debating whether to buy a…

Read more »

Dividend Shares

This blue-chip FTSE stock just fell 12.5% in a day. Is it time to consider buying?

Smith & Nephew is a well-known, blue-chip FTSE stock with a decent dividend yield. And its share price just dropped…

Read more »

Investing Articles

At 72p, the Vodafone share price looks to be at least 33% undervalued to me

Our writer looks at a number of valuation measures to determine whether the Vodafone share price reflects the fair value…

Read more »