Newspaper article The Journal (Newcastle, England)

Mining Sector Still Has Plenty to Yield

Newspaper article The Journal (Newcastle, England)

Mining Sector Still Has Plenty to Yield

Article excerpt

Byline: ANDREW MILLER

MINING companies' earnings fell sharply in the first half of this year. But the sector remains well positioned to benefit from global recovery. With demand now picking up, growth in supply of many metals is still lagging.

This imbalance will underpin growth in mining companies'' earnings.

Capacity constraints on output will be relaxed, but only slowly. Mining companies are still waiting for prices to stabilise before re-starting their idle capacity.

The short to medium-term buffer of stocks from which higher demand must be serviced remains generally low, and this should also be positive for prices. Further helped by companies'' ongoing cost-cutting programmes, we believe company earnings could double within the next 12 months.

Rising commodity prices could also accelerate merger and acquisitions (M&A) activity within the sector. Various miners have been involved in deal discussions in the past few months including BHP Billiton, Rio Tinto, Xstrata and Anglo American.

Prompted by a continuing recovery in commodity prices, and company share prices, other players could be willing to get involved and snap up assets before it is too late. China is also likely to play an important part in this game.

In the UK, BHP Billiton remains our favoured large, diversified miner. The group''s already clean balance sheet and low-cost operations give it less gearing to higher commodity prices. (In other words, companies with thinner operating margins may benefit proportionately more.) But we continue to see BHP as one of the best in class, in terms of asset operations, capital structure and growth opportunities. BHP offers the highest yield among diversified miners, but its distribution policy remains undemanding, meaning it will be very well positioned to participate in opportunistic M&A. …

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