To say that 2015 has been an unmitigated disaster for the mining and energy industries would be something of a huge understatement. In the past six months, resources-related stocks have comprised five of the FTSE 100’s top ten losers thanks to the steady collapse in commodity prices.
Diversified digger Glencore has led the way, its decision to trash the dividend contributing largely to the 67% share value decline endured during the period. But things have been little better over at industry giants BHP Billiton and Rio Tinto, firms that have seen their share prices rattle 41% and 25% lower respectively.
And as commodity prices continue to fall, I fully expect shares across the sector to keep on plummeting.
Forecasts remain frightful
Bellwether metal copper — so-called because of its use across a wide range of applications — remains anchored around six-year lows around $4,500 per tonne. Iron ore struck fresh decade-long lows this week around $42 per tonne. And Brent crude looks set to break to fresh multi-year lows below $40 per barrel.
The entire commodities sector remains locked in a crushing downtrend, and the situation looks set to get worse as Chinese economic cooling intensifies and production levels in key markets head higher.
Adding to the pressure of worsening supply dynamics, the mining industry faces an additional problem in the form of a strengthening US dollar. The greenback has moved back to March’s multi-year highs around 1.05 versus the euro, with safe-haven buying — and expectations of Fed rate rises — boosting investor appetite once again.
Plenty of room for further falls
Given these factors, I believe that both Rio Tinto and BHP Billiton remain significantly overvalued despite their plunging share prices.
Rio Tinto is expected to chalk up a second successive earnings dip in 2015, this time by an eye-watering 48% and which leaves the business dealing on a P/E multiple of 12.8 times. Although such a reading is not expensive based on conventional metrics, I reckon a reading closer to the bargain benchmark of 10 times would be a better reflection of the risks facing the business.
A subsequent price re-rating would leave the company dealing at 1,700p per share, representing a stunning 23% decline from current share values.
And the story is even more worrying over at BHP Billiton. Predictions of a 57% bottom-line slide in the year to June 2016 results in a ridiculously-elevated P/E rating of 24.6 times. Should prices fall beck in line with the marker of 10 times forward earnings, the commodities titan would see its stock value plummet 58% to around 334p per share.
It could be argued that both firms’ gargantuan dividend yields more than offset their high earnings multiples — BHP Billiton and Rio Tinto boast readouts of 9.5% and 6.8% correspondingly.
But the rapid scale of capex cutbacks and asset sales illustrate the hulking pressure on the companies’ balance sheets. And with revenues set to drag well into the future, I believe current payout projections are on course to disappoint.
