Mining for Deep Value

LONDON -- Although there is no official definition of a bear market, one oft-used description is a price slide of 20% or more in a period lasting at least two months.

On this definition, there is now a bear market in the shares of FTSE 100 (INDEX: ^FTSE  ) mining companies.

Pop goes the market
Exactly two months ago, on March 16, the blue-chip FTSE 100 index of elite British companies hit its 2012 closing high of 5,966. As I write this morning, the Footsie stands at 5,398, down nearly 570 points (9.5%) in two months.

Then again, certain sectors of the market have fared much worse than others in the recent slide. Take a look at this table, which shows the sliding share prices of nine FTSE 100-listed mining firms.

Company

Change (%)

Rio Tinto  (NYSE: RIO  )

(19.8)

Polymetal International

(19.9)

Evraz

(21.6)

Anglo American (OTC: AAUKY)

(22.5)

Fresnillo

(25.4)

Kazakhmys

(28.6)

Randgold Resources

(30.3)

Vedanta Resources

(30.3)

Eurasian National Resources Corp.

(31.5)

Source: Bloomberg. March 16, 2012 to May 16, 2012.

As you can see, the share prices of these large-cap miners have been hammered since the FTSE 100 peaked on March 16. Even the best of the bunch, Rio Tinto, has seen its share price dive by almost a fifth. Worst hit is ENRC, whose shares have crashed by nearly a third in two months.

Digging for bargains
Of course, these price falls, while deeper than the wider market's slide, could be justified. After all, the prices of base and precious metals have lost a lot of their shine over the past two months. What's more, mining companies have high operational gearing, so modest falls for metals prices can translate into deeper dives for profits.

That said, let's check the forecasts for these firms' fundamentals to see if any have dropped into bargain-basement territory.

Company

Price (pence)

Rating

Dividend Yield (%)

Dividend Cover

Kazakhmys 688 4.8 2.3 8.2
ENRC 465.9 6.4 3.1 4.7
Rio Tinto 2,886.5 6.5 3.1 4.6
Polymetal International 755.5 7.2 2.4 5.8
Anglo American 2,053.5 7.6 2.3 5.5
Evraz 324.6 9.2 3.7 2.9
Vedanta Resources 989 11 3 2.8
Randgold Resources 4,498 12.5 0.7 10.3
Fresnillo 1,339 19.4 2.6 2

Source: Digital Look.

I've sorted these nine entries based on their forward price-to-earnings ratings, from lowest to highest.

Although Kazakhmys and ENRC are probably worth a punt -- thanks to ratings of 4.8 and 6.4 times earnings, respectively -- both operate in high-risk regions of the "Wild East" (former Soviet states). Hence, I'd fully expect these firms to trade on "danger money" ratings.

Playing it safe
What's more, in uncertain times, I'd urge investors to stick with the "big is beautiful" mantra, as mega-cap firms tend to be more defensive and less volatile during the market's periodic downturns.

Hence, I like the look of mining giant Rio Tinto, which trades on just 6.5 times earnings but offers a forecast dividend yield of 3.1%, covered a generous 4.6 times. On a similar risk-reward argument, I'd add Anglo American to My Watchlist, as it trades on 7.6 times forward earnings while offering a yield of 2.3%, covered 5.5 times.

Then again, a balanced approach of investing evenly across the five lowest-rated miners in the table above could also pay off. These five have an average rating of 6.5 times forecast earnings and an average dividend of 2.6%, covered 5.8 times.

Frankly, these are undemanding fundamentals for FTSE 100 firms!

Are you looking to profit from this uncertain economy? "10 Steps To Making A Million In The Market" is The Motley Fool's latest report. We urge you to read it today -- your wealth could be transformed. Click here now to request your free, no-obligation copy. The Motley Fool is helping Britain invest. Better.

Further investment opportunities:

Cliff does not own any of the shares mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 1888181, ~/Articles/ArticleHandler.aspx, 7/25/2014 7:39:34 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement