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Rio Tinto is a leading international mining group that finds, mines and processes the earth's mineral resources.
The Group's major products include aluminium, copper, diamonds, energy products, gold, industrial minerals (borates, titanium dioxide, salt and talc), and iron ore. Its activities span the world but are strongly...Read more
Mining sector enters deep value territory, says brokerMay 24 2012, 11:15am
The UK's mining sector should be a hotbed for value investors given the recent underperformance, according to broker Jefferies.
Miners are “attractively valued” at current levels even if the global economy and commodity markets drop back to the lows of 2009, according to the broker.
It also argues that these “trough conditions” are unlikely to materialise in the near-term, which bolsters the case for investment in the top miners.
Even if growth slows and operating margins for the top miners drop back to the trough period, the stocks still offer good value for investors it suggests.
Jefferies reckons there is not as much risk in mining stocks as the current negative market sentiment suggests.
They blame the current poor performance on a consensus belief that “China is significantly slowing, commodity price risk is to the downside from current levels, operating and capital costs are still rising, and capital allocation decisions are not consistent with a desire to maximise shareholder value.”
The broker admitted it had become increasingly cautious about the fundamental outlook for listed miners in recent weeks, highlighting the risk of negative earnings momentum.
However, it believes the bleak economic outlook is already priced into mining stocks and the trade-off between risk and reward is “attractive” in the case of the high quality miners.
The sector can’t rely on value alone if it is to see a turnaround in fortunes however.
“Shareholder friendly capital allocation decisions may be needed to drive outperformance for the sector.
“We are optimistic in this regard and would buy shares of high quality miners now,” the broker concluded.