BHP, RIO, GLEN, AAL & ANTO: are the majors great value right now?
I decided to have bit of a change of pace today; while we wait for Alien, Arc, Helix and Rome to deliver their news - it's worth having a quick look at some of the most popular FTSE 100 majors on the market.
Put simply, they're not having a great time.
BHP shares are down 27% year-to-date. The company is the largest iron ore producer in the world - the iron ore price has been sinking on the back of weak Chinese demand - and the stock is reflecting this reality. While copper is growing strongly, it recently warned of an 'uneven' Chinese recovery (translation = we're not sure if the real estate subsidies are coming back).
Rio Tinto shares are down 22% year-to-date, essentially driven by weak production numbers. Ferrous metal production dropped by 2% year-over-year last quarter, copper is expected to be at the lower end of annual expectations, and its alumina output forecast was also recently cut due to gas supply problems at a major asset.
Glencore shares are down 22% year-to-date, again driven by China fears. The debt is high, lawsuits aplenty, and profit margins are hovering around 2% compared to circa 7% this time last year.
Anglo American shares have more than halved in two years, driven by collapsing PGM, nickel and diamond pricing. The company is mid-turnaround after the BHP takeover attempt, and is selling off the unprofitable divisions to become a leaner more attractive entity.
Antofagasta shares have crashed since May, driven by weakened copper output and expectations (Q2 output grew by 20%, though 2024 as a whole is coming in at the lower end of expectations).
So are there bargains to be had? For context, BHP has a dividend yield of 7.9%, Rio 6.2%, Glencore 2.7%, Anglo 3.2% and Antofagasta 1.5%.
The problem is that dividend yields are based on a trailing 12 month basis - and for example, BHP's profit margins (and therefore dividend coverage) are sinking with the iron ore price.
But we all know that there is a metals squeeze coming down the track soon enough.
BHP: while Baowu (read the CCP) is warning of a 'severe winter' for the steel industry, BHP has the highest and most resilient profit margins due to its scale - and will actually benefit in the longer term if other mines are placed on care and maintenance. Morgans has an 'add' rating and an AU$48.30 target on the stock, $10 higher than today. The miner is diversifying strongly into other metals, and the Jansen potash project will come online in two years.
Goldman Sachs also have a 'buy' and an AU$49.10 target, noting that:
'BHP is currently trading at ~5.5x NTM EBITDA (25-yr average EV/EBITDA of 6.6x), a premium to RIO on ~4.5x; and at 0.85xNAV vs RIO at 0.75x NAV. Over the last 10 years, BHP has traded at a ~0.5x premium to global mining peers. We believe this premium can be partly maintained due to ongoing superior margins and operating performance (particularly in Pilbara iron ore where BHP maintains superior FCF/t vs. peers).'
Then look at Rio. All approvals for Simandou (the world's largest iron ore project) in Guinea have been received, and first production from the two billion ton asset will start as early as next year. BHP has a price-to-earnings ratio of circa 17; Rio's is just 10. This is cheap as chips; for context, even after the recent fall, Nvidia's stands at 50.
Rio is just fundamentally cheap.
Glencore is also good value - over the last five years, earnings have grown by around 50% per annum, almost 5x the sector average - and the analyst consensus is that earnings will keep growing at 11% per year. This is good stuff for a cyclical company, and is bolstered by the LNG deal with Shenzhen - alongside its wider position as not just a miner, but as a commodities trader as the metals supply gap heats up.
I will also note that the dividend is fairly stingy compared to earnings, so expect this to be upped over 2025.
Anglo is effectively going to be a copper only company. The only assets not being sold off are the Woodsmith fertiliser project, alongside the copper - and Woodsmith is never ever going to work. They know this already, hence will keep cutting both capex allocation and the asset's balance sheet value until hopefully they find something bigger.
And the stock is still trading at a decent premium to the BHP takeover offer - so investors clearly think the turnaround is going to happen; it's forecasting 32% annual earnings growth for the next five years. Profit margins may have fallen from 12.9% to 0.9%, but once the unprofitable divisions are cut off like the gangrenous limbs they are, it may all be gravy.
Antofagasta remains the major copper play on the FTSE (until Anglo divests), and yes grades are declining in South America, but they are continually increasing volumes to compensate - for example, Los Pelambres has completed its Phase 1 expansion. CEO Arriagada has highlighted his consistent investment into the mines, while UBS considers the stock the best London copper play, noting:
'We continue to believe "traditional" end-use sectors (construction, manufacturing, consumer durables) will eventually bounce back, supported by restocking and China demand is improving. In our view smelter cuts will materialise in the fourth quarter of this year and early into 2025. We see a low probability of material growth in mine supply in 2025/26 pushing the market into surplus and believe the physical market will tighten over the next 6-12m and forecast protracted deficits resulting in elevated copper prices for an extended period.'
These large caps are all cheap - and much of the bad news is now priced in.
And in small cap news...
There's been a smattering of news, but I think investors should keep a weather eye out on Amaroq Minerals. A new mineral resource is expected by Q1 at the latest, and I'm not sure if anyone's noticed, but gold miners are massively on the radar for M&A.
AngloGold is buying Centamin; Greatland is buying out Newmont's share of Havieron and Telfer. First gold at Amaroq is happening next quarter, and I would not be surprised to see elevated interest.
Just head over to their Twitter feed and look at the photos being posted out. The gold is visibly just there, ready to be extracted and sold.
One other is Sovereign Metals, where MST Access has written an excellent overview of the assets. I remain confident Rio will buy Kasiya - and the report is essential reading for investors.
- Charles Archer, 12/9/2024