The Mining Industry Is Healing But Stocks Have Rallied Too Much

  • Investec says miners have done a lot to save troubled sector
  • Anglo American, Glencore are U.K.'s best performers in 2016

Mining companies have done much to save their troubled industry but the rally in stocks may have run too far, Investec Plc warned.

“The miners themselves are very different animals,” Jeremy Wrathall, head of global natural resources in London at Investec, said in a Bloomberg TV interview on Wednesday. They’ve “reduced their debt, reduced their costs, cut their dividends and done a lot to save themselves and heal themselves. But we think things have gone a bit too far on valuations.”

Share prices rallied this year amid gains in iron ore and base metals and as Chinese authorities moved to stabilize the economy in the biggest commodities user. That’s fed through to companies such as Anglo American Plc and Glencore Plc, which are now the best performers in the U.K.’s benchmark stock index, after ending last year as the worst.

Glencore has scrapped its dividend, sold assets and raised $2.5 billion in a stock sale to reassure investors that it can survive after years of slumping raw-material prices brought on by China’s slowdown. Anglo is trying to engineer a turnaround by selling more than half its mines and exiting the iron ore and coal business to focus on its best assets -- diamonds, platinum and copper. Other firms have cut unprofitable output.

Still, banks such as Citigroup Inc. remain unconvinced. It reduced its outlook for the metals and mining sector to bearish from neutral on Monday, saying that a rally in the first quarter had left valuations stretched in the short term. 

The FTSE 350 Mining Index advanced 48 percent this year and touched an eight-month high on Wednesday. Anglo, based in London, has more than doubled, while Baar, Switzerland-based Glencore surged 90 percent.

“Fundamental changes have occurred in the sector,” said Wrathall. “It’s a much improved picture.”

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