BlackRock Inc. (BLK), the world’s biggest money manager, is buying mining stocks this week amid a global rout in shares of raw materials producers sparked by concern slowing economic growth will sap demand for commodities.
“What we have been doing is buying quality over the last three days,” Catherine Raw, who helps manage BlackRock’s $17 billion World Mining Fund, said yesterday in a phone interview from London. “The stocks look so compellingly cheap even if you were to see some earnings downgrades coming through,” she said, declining to identify specific companies.
A rout in share markets since July 26 erased about $7.9 trillion in equity values and dragged those in Europe and the U.S. to the cheapest levels in about 2 1/2 years. A 19 percent plunge in the FTSE 350 Mining Index (F3MNG) hasn’t been matched by raw material prices, with the London Metals Index falling 12 percent and iron ore, the key steel-making ingredient, up 0.5 percent.
“I’m still relatively confident that these higher commodity prices are going to stay with us for a longer period because what’s happening is demand growth is not being met by supply growth,” Raw said. “What we’re confident in is that at some point we will see a recovery. We’re not perfect market timers, we can’t predict the bottom, so we have to recognize when we see value.”
Valuations in the mining industry are pricing in a “weak commodity price scenario” and there is value in stocks such as BHP Billiton Ltd. (BHP), Glencore International Plc and Xstrata Plc (XTA), Deutsche Bank AG analysts wrote in an Aug. 9 report.
The FTSE 350 mining index jumped 4 percent today, the most since Nov. 4, led by gains in BHP, which advanced 5.4 percent, Rio Tinto Group, 3.4 percent, Xstrata, 5.3 percent and Glencore, 5.4 percent.
Rio Tinto, Glencore and Xstrata are among the largest mining companies that have the “best earnings resilience in a downside scenario,” Liberum Capital Ltd. said yesterday.
Central bankers are trying to restore investor confidence, with the Federal Reserve pledging to keep interest rates near zero through at least mid-2013 to bolster U.S. growth, and the European Central Bank buying bonds to stem a sell off that’s threatening to spread to France.
China, the world’s biggest consumer of raw materials and the fastest-growing major economy, will maintain expansion of 7 percent to 9 percent, BHP Chairman Jac Nasser said yesterday in Sydney. BlackRock is the largest shareholder of Melbourne-based BHP, the biggest mining company.
Factoring in Quality
“What we’ve done is taken advantage of these markets to actually go in and buy those stocks where we can see the balance sheets are strong, their positions on the cost curve mean that they are much more resilient to any volatility in commodity prices and yet you can buy them on earnings levels that are not factoring that quality in at all,” Raw said.
The stock plunge has dragged the price-to-earnings ratio of the 21-member FTSE 350 Mining Index down to 6.8 times estimated profit, from a July 2009 peak of 19.9 times, according to data compiled by Bloomberg.
That compares with a ratio of 9 for the benchmark FTSE 100 now. Shares of mining companies are factoring in a 30 percent to 40 percent drop in earnings, Credit Suisse Group AG said on Aug. 9.
“The likely second-half mining equity outlook now looks to be a ‘dead-cat bounce’ in the near term, followed by ‘death by 1,000 cuts,’” Citigroup Inc. analysts led by Jon Bergtheil and Heath Jansen wrote in an Aug. 8 report. “The best-case outlook now may be the miners stuck in a range between 2011 highs and recent lows. We would sell near the highs.”
BlackRock’s World Mining Fund, which counts Rio, BHP, Freeport-McMoRan Copper & Gold Inc. (FCX), Teck Resources Ltd. (TCK/B) and Vale SA (VALE3) as its top-five holdings, is down 19 percent this year and 17 percent in the past month. It returned 32 percent last year. That compares with the 18 percent drop in the HSBC Global Mining Index this year and about 15 percent in the past month.
“Where we’ve been holding cash, we’ve then put it into the markets and also we’ve done a bit of rotation in the portfolios,” Raw said. “We’ve been focusing on the bulk commodity producers in particular. So both iron ore as well as mineral sands for example. These are structural stories where you can actually see the profit margins of these companies are going to remain strong.”
Mining companies are better placed to weather a rout in equity markets, lower commodity prices and any constraints on funding compared with the 2008 financial crisis, she said. Rio, the world’s second-largest mining company, fell 72 percent in 2008, Xstrata 82 percent and Kazakhmys Plc (KAZ) 83 percent.
“The balance sheets are so much stronger than they were then because they learnt that painful lesson,” she said. “Yes, you can have nervousness over commodity prices, nervousness over economic growth, but you don’t have nervousness over companies defaulting.”
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