Bargain-hunting investors may want to take a fresh look at the world’s big miners of base metals.
As the panic over the spread of the coronavirus outbreak shows tentative signs of easing, producers of iron ore and similar bulk commodities appear to be attractively priced for gains.
Granted, those potential gains come with risk attached. The coronavirus remains an active threat.
However, a helpful summary page maintained by Johns Hopkins University shows the rate of increase in new coronavirus cases is flattening. Market watchers are taking note. On Wednesday, Deutsche Bank strategist Craig Nicol and Société Générale strategist Kit Juckes both pointed to early signs the outbreak may be plateauing in China.
Investors who want to bet on this trend continuing should consider taking a stake in mining giants such as Anglo American PLC, BHP Group Ltd. and Rio Tinto PLC. Their share prices have all suffered in recent weeks as fears of a virus-induced slump in Chinese economic output have raised concerns about demand for commodity metals.
Each of these big miners now offers an unusually tempting yield. Their share prices could bounce upward, too, if the coronavirus outbreak comes under control over the next couple of months.
To be sure, anyone contemplating these stocks has to brace for possible turbulence. “China’s economy is likely to contract sharply in the first quarter, as a result of the measures that have been taken to limit the spread of the new coronavirus,” Mark Williams, chief Asia economist at Capital Economics, wrote in a note Wednesday.
He predicted first-quarter growth would plummet from an annualized rate of just under 6 per cent at the end of 2019 to around 2 per cent.
He also cautioned that while the number of new infections is trending down, it is still too early to declare the outbreak is under control. Two scenarios seem equally plausible.
In the benign case, China quickly brings the virus under control and makes up the first-quarter loss in output over the next few quarters. In that case, economic growth across all of 2020 slows by just a half percentage point from 2019.
In the not-so-benign scenario, “firms don’t reopen soon, household incomes suffer and the economy only gets back on its feet around the middle of the year,” Mr. Williams said. In that case, China’s growth rate over the year ahead could plunge by a couple of percentage points.
Even the dire case, though, would not be a disaster for patient investors. Anglo American, BHP and Rio all trade as American depositary receipts on the New York Stock Exchange and yield anywhere from 4.4 per cent (Anglo) to 6 per cent (BHP). Those robust payouts offer a compelling reason for shareholders to stick around and wait for a Chinese recovery.
At current share prices, potential losses look limited. Anglo and Rio both change hands for price-to-earnings multiples under 10, while BHP goes for 13 times earnings. All are trading below levels they hit before the coronavirus outbreak.
The weak share prices and bargain-basement valuations on these stocks reflect the murky outlook for Chinese metal demand, especially when it comes to iron ore and copper. Analysts are only moderately enthusiastic and display a wide range of opinions.
Ephrem Ravi of Citigroup, for instance, has a neutral rating on BHP and Rio and a buy rating on Anglo. Meanwhile, Tyler Broda of Royal Bank classifies Anglo as a top pick, while putting an outperform rating on BHP and an underperform label on Rio.
In many ways, though, this set-up should appeal to cautious investors. The big miners offer a chance to buy dominant producers of key commodities at bargain prices while enjoying a decent yield. Even a small bit of good news about the virus outbreak, or about China’s economy, could prod analysts to revise their opinions and send share prices higher.