I don’t often check the FTSE 100 index in the morning and see a whole sector dominating the top 10 risers. But that’s what happened Thursday, with mining stocks among the leaders.
As I write, BHP, Anglo American and Rio Tinto are all on the way up. Precious metals miners Polymetal and Fresnillo are there with them. And steel specialist Evraz is tagging along for the ride.
We’ve seen a surge since the start of November. Well, apart from the precious metals specialists. Polymetal and Fresnillo are pretty much flat over that period. I steer clear of precious metals, as their prices tend to be led by sentiment. The rising price of gold in 2020 has helped push up share prices, but that’s surely a relatively short-term thing.
The FTSE 100’s generalised miners are driven by long-term economic prospects, and that fits perfectly with my investing horizon. Those stocks have climbed strongly.
Easily beating the FTSE 100
Anglo American is the top miner with a 39% rise in just six-and-a-half weeks. BHP is second on a gain of 35%, followed by Evraz on 32%. Rio Tinto makes fourth place with a still impressive 30%. Since the start of 2020, they’re all in positive territory, while the Footsie is down 13%.
I think the longer-term outlook can lead to shorter-term periods of undervaluation. And I reckon investors have overlooked the mining sector for a little while now, since well before the Covid-19 pandemic arrived. I offered that view a couple of months ago, and the whole sector has continued to outperform.
But am I really thinking of buying into a FTSE 100 sector that’s on a high at the moment? When so many others still suffer and perhaps look better value? Well, let’s examine some valuations. Even after a strong year, and an especially strong month, Rio Tinto shares are still on a forecast December 2021 P/E of under 10. That’s with a 10% EPS rise expected for the current year, followed by another 7% next. Oh, and analysts predict dividend yields of 6% in 2020 and 6.6% in 2021.
Attractive sector valuations
The picture is similar across the board, with Anglo American on a predicted 2021 P/E of 10, with a more modest (but very well covered) dividend yield of 4.2%. Analysts put BHP on a higher P/E (for the year ending June 2021) of 11.5, though with a fat dividend yield of 6.1%.
Evraz is a bit different, being in the entire steel business from mining right through to finished products. It’s also the cheapest on the same fundamental valuations. We’re looking at a 2021 P/E of under nine, and a forecast dividend yield of 8%. I rate Evraz as the riskiest of the bunch, which I think is reflected in its lower valuation. But I do think it’s good value, along with the traditional miners in the FTSE 100 index.
Investors often avoid the mining sector, as it tends to be cyclical. That can be a particular disadvantage for fund managers who are focused on year-on-year, and even quarter-on-quarter, figures. But as a private investor with a long-term outlook, I see a cyclical sector like this as an attractive retirement investment.
