Rio Tinto fell short of analyst estimates when it posted first quarter results due to tropical storms and maintenance difficulties, and BlackRock announced the closure of Evy Hambro’s Mining Opportunities Fund which shrunk to below the £1m mark.
How does this news impact the investment landscape for those surveying opportunities in the resources and mining sector?
Medium to high risk
Commenting on the first quarter results of Rio Tinto, Helal Miah, investment research analyst at The Share Centre, remains confident of an improving global economic environment for the mining company.
“We are satisfied with the results and are confident in the company’s outlook,” he said.
“Weather related and maintenance difficulties impacted the figures, however investors should not be concerned as the company has maintained its production guidance for the full year. The stock offers a mixture of capital growth and dividend income for investors willing to accept a medium to higher level of risk.”
He added that the completion of infrastructure works last year helped boost production in the first quarter this year, so investors should be aware that Rio Tinto’s further expansion works are yet to be completed.
The “unloved” theme
Randeep Somel of M&G Global Basics Fund has upped the fund’s exposure to 14.2% since taking over as lead manager last year.
According to Somel, there’s three reasons to be positive about the mining sector: it’s unloved so stocks are cheap, there are concerns about China, and companies are changing.
At the end of 2010, the mining sector had a 5.5% weighting in the MSCI All Country World Index. Today, that weighting has dwindled to 1.5%.
Alongside world index ratings, China’s stalling growth figures are fuelling investor concerns. But for Somel, China bears a positive story for big mining companies.
Around 40% of the iron ore consumed by China is produced from domestic mines. However, the iron ore produced is low-grade and poor quality, which means more coal is needed to fire up the steel mills. This is turn has caused a pollution crisis, pushing the government to step in with control measures. Part of these measures include purchasing higher quality iron ore, which can be guaranteed by the big three mining conglomerates Vale, BHP Billiton and Rio Tinto.
Hence the Chinese government is sanctioning foreign iron ore imports as it realises the need for assets and believes the big mining companies offer cheap assets, according to Somel.
The case for BHP Billiton
In particular Somel has bought into BHP Billiton shares, the Anglo-Australian multinational who is the world’s largest mining company. A key reason he likes this company is down to the new management style that CEO Andrew Mackenzie has initiated since taking over from Marius Kloppers. His strategy is to reinvest in capex, sell on-core assets and achieve return on capital.
“BHP Billiton is paying off its debt, and has the ability to grow its dividend. Mackenzie realises the company’s assets and slashed costs by $5.5bn last year. In addition, the company is not reliant on a single resource: it has less than 50% invested in iron ore, compared to Vale which has over 90% invested in iron ore which it mainly sources from Brazil.”
Another important factor besides the company, is the locations in which the firm branches out in.
“Investors don’t realise that governments are trying to be more helpful. For example the DRC are encouraging copper mining, as are Chile and Peru.”
Tumbling emerging market currencies, which are impacting the Australian dollar due to geographic proximity, also offer a net benefit to mining companies who sell all their cargo in US dollars.
An upside to the picture
Mining companies have been given a face-lift as new chief executives are taking drastic action. Weather-related and political risks remain a concern, but new strategies are reshaping the mining sector. A diversified portfolio that is both resource and country specific promises to boost dividend growth for shareholders. Short-term production hits aside, most signs indicate that in the next 5-10 years the mining sector could offer profits to investors willing to accept medium to high risks.
