Mining companies go through different ups and downs in any given cycle, but this time around the outlook is very unpredictable, mainly because of escalating trade tension between the United States and China. Commodity prices are slumping as demand has softened and Bond spreads have widened in the United States signifying growing concern about the ability of corporate and other private borrowers to service their debt.
The tariffs imposed by the US on Chinese exports have had an adverse impact on the Chinese economy, and this led to a slowdown in copper demand. Copper price has slumped more than 7 per cent in the past six months. It is a cause of great concern that copper prices are falling when global economy remains notionally in the growth cycle, and that is why mining stocks are declining globally, post a good run achieved in 2018. And many of mining stocks have tumbled substantially from their 52-week highs.
Suddenly, Iron Ore (TIOc1) prices have fallen below US$100 and were quoting at US$99.51, at the time of writing (as on August 08, 2019. Prices have plunged more than 20% on a month-to-date basis. In the year-ago period, Iron Ore prices had touched a 52-week high of US$123.19 and a 52-week low of US$65.57 respectively.
One reason behind the downtrend in the Iron Ore prices could be softening demand, while the second one could be that iron ore prices had appreciated substantially from March 2019 till July 2019, Chinese mills were not buying iron ore to produce steel with fears of incurring losses.
Also, manufacturing activities are softening as recent Manufacturing PMI continued to decline globally, further mounting problems for the mining companies.
Recently, the Federal Reserve has reduced rates for the first time since the financial crisis hit in 2008 and US President is demanding for more such rate cuts; also, Chinese Yuan has devalued substantially and so is the sterling.
Two FTSE 100 miners trading substantially below their 50-day simple moving average price
Rio Tinto (LSE: RIO)
Rio Tinto Plc (RIO) is a global metal and mining company that focuses on exploring, mining and processing the mineral resources. The company is headquartered in London, United Kingdom and is a globally renowned leader in aluminium. The company's operations are organised in four segments, namely Energy & Mineral, Copper & Diamonds, Aluminium and Iron Ore. Iron Ore operations comprise of an integrated network of 16 mines in Western Australia, four independent port terminals, a 1,700-kilometre rail network and related infrastructure, which complement each other to deliver high-quality iron ore to customers. The Aluminium operations manage the process from start to finish and comprise of an integrated portfolio of mines, refineries and smelters, making the company global leader in aluminium, with large-scale, high-quality bauxite mines and alumina refineries. The portfolio of Copper and Diamond Mines share expertise in underground mining, including a fully integrated global exploration, mining and sales and marketing business for diamonds, and operations in various stages in the mining lifecycle, from exploration to rehabilitation of copper. The Energy & Mineral division includes ten mining sites with operations in 6 countries to produce borates, iron ore concentrate and pellets, salt, titanium dioxide and uranium.
Recently the group released its financial results for the first half of 2019. Impact of lower volumes and lower aluminium prices were offset by Higher Iron ore prices. Excluding the $0.8 billion contribution by the coking coal assets divested in 2018, consolidated sales revenue of $20.7 billion was 9% higher than that in the first half of 2018. The operating profit during the period was $5.2 billion, against $6.4 billion recorded in the prior year, reflecting increase in impairment charges. Lower volumes and higher costs in iron ore were more than offset by an increase in iron ore prices, which drove underlying EBITDA to $10.3 billion, which was 19% higher than that in the first half of 2018 and led to an EBITDA margin of 47%. Even as lower sales volumes reduced underlying EBITDA by $232 million, commodity price movements increased underlying EBITDA by $1,878 million in the first half of 2019. Profit before finance charges and taxation amounted to $5.5 billion, while profit before taxation was $5.2 billion. The company recorded a net profit of $2.9 billion in the first half of 2019 (2018 first half: $4.5 billion), and net profit attributable to the owners totaled to $4.1 billion (2018 first half: $4.4 billion) in first half of 2019, mainly reflecting the impairment of Oyu Tolgoi. Due to a strong contribution from Iron Ore, underlying earnings during the period were $4.9 billion, which was 12% higher than that in the prior period of last year. Basic earnings per share remained flat over the year at 252.5 cents, while the underlying earnings per share rose by 19% to record 301.5 cents. The group declared an ordinary dividend per share of 151 cents and announced a special dividend of 61 cents.
Daily price chart (as on August 08, 2019), before the market close. (Source: Thomson Reuters)
Shares of RIO have declined substantially since late July to date, and at the current trading level were quoting approximately 11.4% below its 50-day simple moving price, a technical measure that indicates a downtrend in the stock price. Its shares have registered a 52-weeks high of GBX 5,039.0 and a 52-weeks low of GBX 3,460.0 respectively.
Antofagasta Plc (LSE: ANTO)
Antofagasta Plc (ANTO) is primarily engaged in activities related to exploration, evaluation and mining of copper in Chile. The company was incorporated in the year 1888 and is headquartered in London, the United Kingdom. The company's operations are divided into two reportable segments being Mining and Transport for management purposes. The company's mining segment is further split based on exploration activities and mines. In the financial year 2018, the company's revenue from Los Pelambres and Transport division had increased as compared to last year (FY17). The company's main product is copper, and its production is an important operational measure. In the FY2018 the company achieved good production volume of 725,300 tonnes, an increase of 3 per cent over 2017 production.
Financial results- FY18
In the financial year ending December 31, 2018, the company's revenues stood at $4,733.1 million as against $4,749.4 million in the Financial Year 2017. There was a modest decline of 0.3 per cent due to of 6.3 per cent reduction in the copper prices but was partially offset by higher copper sales volume & higher molybdenum revenues. EBITDA for FY18 stood at $2,228.3 million and declined by 13.9 per cent against $2,586.6 million in FY17, due to grade declines and higher input costs. The company's Operating profit from subsidiaries stood at $1,345 million in FY2018 versus $1,841.1 million in FY2017. The company's total profit from operations, associates and joint ventures stood at $1,367.2 million in FY2018 versus $1,900.8 million in FY2017. The PBT (profit before tax) was reported at $1,252.7 million in FY2018 as against $1,830.8 million in the FY2017. Net Profit for the period stood at $880.3 million in the FY2018 versus $1,197.7 million in the FY2017. For FY18, Earnings per share (continued and discontinued operations) stood at 55.1 cents as compared to 76.2 cents in the previous financial year and declined by 27.7 per cent, due to lower EBITDA. In line with the company's policy, a final dividend of 37 cents per share was announced, bringing the total dividend for the year to 43.8 cents per share.
Daily price chart (as on August 08, 2019), before the market close. (Source: Thomson Reuters)
At the time of writing (before the market close at 01:31 PM GMT), shares of the ANTO were quoting at GBX 845.2 and added 2.4% in day's session. The 50-day simple moving average price of the stock stood at GBX 881.7 and at the current trading level was quoting marginally below its 50-day simple moving average price. In the year-ago period, shares have registered 52-week high of GBX 1,026 and 52-week low of GBX 713.20 respectively. In the past five trading sessions, the stock has declined by approximately 12.16%, and in the last one month, the stock is down by 6.5%.
Apart from these two companies, several other large-cap mining stocks like BHP Group Plc (BHP) and Anglo-American Plc (AAL) were also trading substantially below their 50-day simple moving average prices, a technical measure which indicates a near-term downtrend. While doing our analysis which was restricted to FTSE 100 mining companies, we found that majority of mining stocks listed on the main market of the London Stock Exchange are in a downtrend on account of the recent fall in the commodity prices and plunging demand as well. Also, with trade tension escalating after recent announcement of US President Trump of another round of tariff imposition on the Chinese imports, it's tough to gauge a clear direction in near-term. However, many of these companies are offering decent dividend yields, and they have a long track record of paying a decent and consistent dividend.
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