Ardevora’s Jeremy Lang takes a slightly different view, however, preferring Anglo American to Rio.
Acknowledging that the sector continues to face significant challenges, with prices unlikely to state a persistent recovery for many years, Lang says the sector represents an interesting opportunity for the businesses prepared to accept life will be permanently tougher.
But, he adds: “For every business shocked into deep restructuring, there is another that still feels safe, seeing the opportunity to buy the assets from the distressed sellers, thinking the risk shifting is an opportunity.”
For Lang, this leads to a paradox, a world in which the riskier looking businesses are the safest to own because they are willing to sell risk.
“Within natural resources, we are buyers of contrite capitulation and sellers of denial,” he said, adding: “Despite superficial similarities, stocks such as Rio Tinto and Anglo American look completely different to us. Rio Tinto, for example, looks like a value trap. Management still appears to be in denial, believing current difficulties are transient and little needs to change from its side. But most investors view it with relative calm, because of its less aggressive pursuit of growth in the past.”
In comparison, Anglo American looks like a value opportunity. Crucially, in our view management know changes need to be made, or the company will face extinction. This means offloading assets and becoming smaller.”
Arguably, for investors, the question of which stock offers more opportunity comes down to whcih characteristic one values more in the current climate.
In the case of Rio, there is a clear intention to return cash to shareholders, working its existing asset base as hard as possible to do so, with capex a secondary consideration, whereas a stock like Anglo clearly has its work cut out for it and is unlikely to have the payment of dividends as its first priority, but its share are coming off a much lower base.
