Second train leaving – Mining sector opportunity

The mining sector has been a heavy under performer so far this year with the sector as a whole trading near historic valuation nadirs and certain stocks now as cheap as they were back in March 2009 – ENRC & Lonmin – on Price to Book bases in particular.

Most of the companies within the sector are trading at conservative price/earnings ratios and a large discount to the market overall. SBM has been bullish on the sector and specific companies for a few months now (see link, page 21 here for our special Mining edition – http://issuu.com/spreadbetmagazine/docs/spreadbet-magazine-v9_generic) and we continue to believe that there is a once in a generation opportunity to buy specific stocks at bargain prices.

Valuations are compelling, the sector is oversold, corporate activity is likely to pick up with M&A next year and potentially provide very attractive short term upsides to those companies at the heart of such activity. Finally, the global macro outlook improving in China in particular and so likely to underpin demand for these companies products through 2013 into 2014.

With the worst of the Great Financial Crisis behind us (we at least hope so!), it is time for a broad market recovery and historically the mining sector has a higher beta than the market meaning that when the market rises the sector rises more than the market and when it falls, it falls more than the market.

2012 has been a tough year for investors in mining stocks with the FTSE 350 mining sector dropping 8.22% while the FTSE 350 and the FTSE 100 rose 4.9% and 3.2% respectively. The massive underperformance is further evidenced by virtue of the fact that only six sectors have returned a negative performance this year. Some stocks have fared much worse like Bumi, ENRC, Lonmin and Kazakhmys amongst the large and mid cap sector whilst lower down the likes of Avocet Mining, Centamin Egypt and Talvivaara have all had sharp shakedowns due to specific issues. Falls of 50-70% have not been uncommon.

The period between April and May, when the overall market was in a downtrend, was particularly severe for the sector and just recently, ahead of the U.S. election & QE3 announcement, this brought out some more bears. Since the U.S. election, the FTSE 350 Mining sector is down 5% – largely in line with the market and so perhaps early indications that the underperformance is coming to and end.

The global economic environment has not been the best for miners this year with the ECB spending much time playing games with Germany in relation to the rising national bond yields on European Government debt while “Helicopter” Ben Bernanke delayed the announcement of QE3 as long as he could. Similarly in China – the globe’s heavest importer of almost every commodity – the country has endured an economic slowdown this year and that has depressed prices of key commodities like iron ore. Adding to the hit list, we have also seen rising labour tension in South Africa. The wildcat strikes which occurred in August left the top 39 South African mining shares in the red and interestingly, they have now given back all the gains made since 2008. Gold production has been hit and platinum suffered particularly too.

The good news is that the International scenario has improved substantially in recent months. We have entered a period of renewed monetary easing with the ECB finally assuming a more dovish stance and then of course the introduction of QE3 by the U.S. Federal Reserve in the third quarter. Monetary easing will help stocks in general but will be particularly helpful for mining. China is showing more signs of resurgent economic growth and many commodities have turned up in recent weeks with the GSCI up around 10% from the lows.

In Europe the situation is still weak but, there is a change in tone from austerity to growth that may help the crisis and also improve demand for commodities. In the U.S. it looks a better than evens bet that the fiscal cliff issue will be averted before the end of the year. If this is the case, then we expect the Mining sector to be in the vanguard of any overall market New Year strength particularly as fund managers take the opportunity to re-balance their portfolios. Additionally, it is a recurrent market phenomenon that the weakest stocks & sectors in a particular year generally enjoy the sharpest rebounds during the first couple of months of the New Year.

The mining sector as a whole presents a compelling buying opportunity today, particularly for those of a medium term time frame. Our picks are ENRC, LMI, VED & BUMI.

For those readers looking to be exposed to the sector in a professionally managed way but with all the benefits of spread betting – leverage opportunity and tax free gains, email us at editor@spreadbetmagazine.com quoting “Mining” to register your interest in our special Natural Resources fund which is part of our Titan Investment Partners managed spread betting funds family and where the Global Macro fund is now up over 40% in 3 months whilst the FTSE is largely flat.