Gold miners look good, but prospects are brightening for general miners too, says John Stepek.
Plunging commodity prices have left investors fretting for the financial health of global mining companies, which borrowed heavily during the boom times to pay for rapid expansion and a rising cost base. Between the end of 2008 and the third quarter of 2013 (when debt levels hit their peak), outstanding metal and mining company debt rose from $53bn to nearly $150bn, according to the Bank of America Merrill Lynch US Metals, Mining and Steel index.
Now that hard times have arrived, the bigger players in the sector are aiming to assuage these fears – shoring up their balance sheets and reducing their interest payments – by buying back their own bonds. As the Financial Times reports, “miners including Barrick Gold and Anglo American completed $2.5bn of bond repurchases” last month. Barrick has used cash from selling off unwanted assets to reduce its debt from $13bn to $10bn, and it aims to pay back a further $2bn this year.
Meanwhile, Anglo – one of the worst-performing stocks in the FTSE 100 last year, falling by roughly 75% in 2015 – paid $1.7bn to buy back $1.83bn of debt (the bonds were trading below face value, handing the company a $130m profit from the trade).
As outlined in our December cover story by Edward Chancellor, we have been keen on gold miners for a few months. The sector has been in the doldrums and thus under pressure to cut costs and improve efficiency for longer than the mining sector in general.Broad-based options for playing the gold mining sector include the expensive but convenient BlackRock Gold & General Fund, or the less expensive exchange-traded fund, the Market Vectors Gold Miners UCITS ETF (LSE: GDXJ).
However, prospects look brighter for general miners too – these efforts to get to grips with the state of balance sheets are just one aspect of a wider move to “shape up” amid the downturn. One of our favourite individual picks in the sector is Rio Tinto (LSE: RIO) – see page opposite for more – but if you’re looking for wider exposure, the BlackRock World Mining Trust (LSE: BRWM) is trading on a discount to net asset value of around 10%. The prospective dividend yield of around 9% still looks rather like wishful thinking.
However, the trust has rebounded sharply since the market lows in January, and with the Federal Reserve still cautious on pushing through further interest rate rises in America, the potential headwind of a stronger dollar seems to be off the cards for now.