LONDON -- The last six months have seen mining stocks crash back to earth, due to growing fears of a Chinese hard landing and general global slowdown.
The flight to safer havens has knocked more than 20% off commodity and natural resources stocks, according to the HSBC Global Mining Index.
With investors fearful of an impending global perfect storm, you might expect mining stocks to go even further underground. But BHP Billiton's latest results suggests there may be some light at the end of the tunnel.
So, is now the time to dig deep for the miners?
BHP Billiton's full-year production report says the company has enjoyed a "robust operating performance in a challenging environment with annual production records achieved across 10 operations,"
This includes a 12th consecutive annual production record at its key Western Australian operation and an 11% increase in copper production in the second quarter of 2012 alone.
Successful development of its U.S. onshore shale gas and liquids operations helped boost petroleum production by 40%. This well-diversified miner also reported a modest increase in metallurgical coal production, although its operations were hit by bad weather and strikes.
Iron in the soul
Analysts liked the results. Buy signals flashed. The share price rose. Suddenly, the slowdown in China -- the world's largest consumer of Australian iron ore -- didn't seem like such a big deal.
Commentators pointed out that while Chinese growth may have slipped to 7.6% a year, this is from a higher base point. With interest rates at 6%, the authorities also have plenty of scope to slash rates further.
Some analysts are now looking beyond the current slowdown to the distant recovery. When the global economy finally starts racing ahead, miners such as BHP Billiton will lead the charge.
It wasn't all good news. Aluminium, diamond, and zinc production disappointed. Higher fuel and energy prices added to its costs (but also its profits). BHP Billiton is also prey to natural disasters, such as the recent floods in Australia.
It also carries net debts of $21.5 billion, up from $15.6 billion last year. This is largely due to its large capital investment program, which could prove a drain on resources in the short term. Later, the rewards should start rolling in.
I bought BHP Billiton myself last year, for its growth prospects rather than its yield. But its yield doesn't look too bad at 3.4%, according to Digital Look. Shareholders have been urging the company to boost the payout, with little success so far. But there is some hope for the future.
Trading on a P/E of 8.4 times earnings, I will be sorely tempted to top up my own holdings if another global panic sends the share price even lower.
Even if demand does slow further, shrinking supply could keep natural resources prices high, says Clive Burstow, who manages Baring Global Mining. "Declines in the supply of iron ore and copper continue, and we believe a number of miners are likely to disappoint in realizing production targets in the coming quarters. This is supportive of higher long-term commodity prices."
Burstow remains optimistic about his sector (as fund managers usually are). "Mining equities, over the long-term, will benefit from the ongoing trend toward urbanization in emerging markets and the increasing demand for hard-to-find, hard-to-mine commodities worldwide."
Both of these trends are likely to survive the financial crisis.
BHP Billiton is the only major miner to report its results in June. So we will have to wait for Rio Tinto and the rest. But their share prices have all taken a knock in recent months.
Rio Tinto is down 25% since February. It now yields 3.1% and trades on a P/E of 6.9. Anglo American is down a whopping 30%, and yields 2.3% on a P/E of 7.4. Vedanta Resources has crashed nearly 38%. It yields 3.9% on a P/E of 13.6.
Given the cyclical nature of commodity prices, now could be a surprisingly good time to drill deeper into mining stocks.
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