These commodity-exposed stocks enjoyed double-digit leaps last week. So what’s driving them and can it continue?
Copper bottom rally
Mining giant Rio Tinto (LSE: RIO) leapt 12% last week, its share price soaring in the wake of Donald Trump’s shock electoral victory. It wasn’t the only mining sector beneficiary. Big names such as Antofagasta, BHP Billiton and Glencore also flew on hopes that Trump would green light $1trn of US infrastructure, which fired up the biggest weekly copper rally in 35 years.
The news also helped to overshadow reports that Rio Tinto had only just reported itself to the Serious Fraud Office over a $10.5m ‘consultancy payment’ for the Simandou project in Guinea, despite having been aware of the issue for more than two months.
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Chinese arithmetic
The Trump bounce is the icing on the cake for Rio Tinto, which has seen its share price almost double from 1,577p to 3,069p since the lows of mid-January. I have to express continuing surprise at the success of the mining sector, given that global growth fears have yet to go away, nor have concerns that China’s economy is floating on a massive credit bubble. If Trump fulfils another electoral promise and slaps a 45% on tariff on Chinese exports – that’s a big if – everything could suddenly come to a head.
However, Rio Tinto has slashed its costs and although debt remains high at around $12.9bn in August, it has been falling, and the company was able to announce in a $3bn bond buyback plan in September, as it puts spare cash to use. Earnings per share (EPS) may have dropped 8% this year but are forecast to rise 11% in 2017, while the yield is forecast to rise to 3.2%. Trading at a forecast 16.9 times earnings Trump had better deliver that infrastructure blitz, and China had better stay afloat. 2016 was the year to invest in Rio Tinto. 2017 could prove tougher.
Here Weir go
Glasgow-based engineer Weir Group (LSE: WEIR) also has reason to celebrate a Trump victory, with its share price up 10% over the past week. Again, it’s down to that hoped-for infrastructure blitz. Trump is in favour of fracking, which is good news for companies providing hydraulic fracturing products and services, such as Weir.
Weir group was hit hard by the falling oil price as demand from shale drillers dried up, yet it has recovered sharply over the last six months, its share price rising 52% in that time. Trump’s victory came at the right time for the group, which published a disappointing set of Q3 interims on 1 November, warning of tough trading conditions but with signs of market improvements.
Glut punishment
Falling oil and gas activity knocked order inputs by 7% year-on-year: after-market orders dipped only 1% lower but worryingly, original equipment input fell 20%. The hope is that the resilient shale industry will rebound but with oil now falling below $45 amid fresh talk of a glut, this is by no means certain.
Earnings per share may drop 19% this year but are forecast to recover strongly in 2017 to rise 27%. I would struggle to recommend the stock on today’s forecast valuation of 26.7 times earnings. Given the risks, I would be looking for a cheaper entry point.
