After plummeting 30 per cent on average last year, global diversified miners have staged a mini rally in the first two months of 2012.
For the first time in a while, this group, which includes Anglo American, BHP Billiton, Rio Tinto and Teck Resources , can feel some optimism. Since Jan. 1, it is up an average of 14 per cent, beating the S&P 500's 8-per-cent gain, and a 6-per-cent gain for the FTSE 100. Plus, its average discount to net asset value has narrowed to about 14 per cent since January.
The question now is can it last? Last year these shares plummeted because of lower commodity prices, higher costs and related earnings downgrades. To continue their rebound, they need commodities to recover and/or production growth.
On the price front, many commodities are still much weaker than they were as recently as August, 2011. Take iron ore. Last August it was worth about $180 (U.S.) per tonne. Today it's about $135 per tonne. Yet there is some hope. Copper, for instance, is back up to $3.86 per pound, a very strong valuation relative to its historical prices.
The problem is that so much of future growth depends on China. As RBC Dominion Securities points out in a research note, commodities such as iron ore are heavily reliant on the pace of Chinese production. And the latest numbers out of the world's second largest economy aren't very encouraging, demonstrating a slowing of GDP growth and industrial production. No doubt, it's still growth, but just not as strong as before.
RBC's take: "While ratings near historical averages do help support the diversified majors, we do not see any catalysts in the near term and would expect some further earnings downgrades into Q2."
Tim Kiladze