2015 has been a year most resource-sector investors would rather forget. Commodity prices have plumbed to 13-year lows, and producers such as Glencore (LSE: GLEN) and Anglo American (LSE: AAL) have really started to feel the pain.
Indeed, despite being two of the world’s largest miners with unrivalled economies of scale, Glencore and Anglo American have been forced to defend repeatedly their business models from highly critical City analysts over the past year as profits have evaporated.
Unfortunately, profits are no longer guaranteed for Glencore and Anglo American, which saw their shares surge to record highs during 2011 as China’s seemingly insatiable demand for raw material pushed commodity prices ever higher. And there’s a very real chance that the good times may never return for these two miners. Commodity prices now seem to be stuck on a downward trajectory, as the market is plagued by oversupply and demand is slumping.
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Impossible task
Glencore and Anglo American’s shares are down a staggering 83% and 85% respectively from the highs of 2011. To recover these losses, Glencore’s shares would have to rise five-fold from present levels. Anglo American’s shares would have to rack up gains of 604% before they returned to 2011 levels.
Is it realistic to expect these miners to stage such a drastic recovery? In a word, no. Anglo American reported a pre-tax profit of $11bn for full-year 2011, which justified the company’s market capitalisation of $70bn. This year, City analysts expect Anglo American to report a pre-tax profit of only $2.3bn. For full-year 2016, analysts have pencilled in a pre-tax profit of only $1.8bn.
Similarly, Glencore reported a pre-tax profit of $4bn for full-year 2010. Analysts have pencilled in a pre-tax profit of $900m for this year and $2bn for 2016. These dismal forecasts are unlikely to convince investors that Glencore is worth 400p+.
Uncontrollable
The biggest problem with trying to forecast the outlook for the mining sector is that it’s impossible to predict where the price of key commodities will be a year, or even six months from now.
Indeed, as I write, the price of iron ore has fallen to $40 per tonne and copper is trading below the cost of production for many miners. There are few, if any, analysts or industry insiders that believed prices could fall this low. Still, a sudden change in supply or demand for iron ore and copper could cause the prices of these commodities to lurch higher, which would be good news for Anglo American and Glencore.
Time to play a recovery?
If you believe that a recovery is just around the corner, then perhaps it could be time to buy Anglo American. The company is currently trading at a forward P/E of 8.3, but as the company’s profits are expected to fall next year, Anglo trades at a 2016 P/E of 12.3. The shares support a dividend yield of 14.5%, although many City analysts expect Anglo’s management to announce a dividend cut next year as the payout is only just covered by earnings per share.
Compared to Anglo American, Glencore looks relatively expensive. The company’s shares trade at a forward P/E of 17.1, which doesn’t leave much room for error if things don’t go to plan.
