Mining for Deep Value
LONDON -- Although there is no official definition of a bear market, one oft-used description is a price slide of 20% or more in a period lasting at least two months.
On this definition, there is now a bear market in the shares of FTSE 100 (INDEX: ^FTSE) mining companies.
Pop goes the market
Exactly two months ago, on March 16, the blue-chip FTSE 100 index of elite British companies hit its 2012 closing high of 5,966. As I write this morning, the Footsie stands at 5,398, down nearly 570 points (9.5%) in two months.
Then again, certain sectors of the market have fared much worse than others in the recent slide. Take a look at this table, which shows the sliding share prices of nine FTSE 100-listed mining firms.
Rio Tinto (NYS: RIO)
Anglo American (OTC: AAUKY)
Eurasian National Resources Corp.
Source: Bloomberg. March 16, 2012 to May 16, 2012.
As you can see, the share prices of these large-cap miners have been hammered since the FTSE 100 peaked on March 16. Even the best of the bunch, Rio Tinto, has seen its share price dive by almost a fifth. Worst hit is ENRC, whose shares have crashed by nearly a third in two months.
Digging for bargains
Of course, these price falls, while deeper than the wider market's slide, could be justified. After all, the prices of base and precious metals have lost a lot of their shine over the past two months. What's more, mining companies have high operational gearing, so modest falls for metals prices can translate into deeper dives for profits.
That said, let's check the forecasts for these firms' fundamentals to see if any have dropped into bargain-basement territory.
Dividend Yield (%)
Source: Digital Look.
I've sorted these nine entries based on their forward price-to-earnings ratings, from lowest to highest.
Although Kazakhmys and ENRC are probably worth a punt -- thanks to ratings of 4.8 and 6.4 times earnings, respectively -- both operate in high-risk regions of the "Wild East" (former Soviet states). Hence, I'd fully expect these firms to trade on "danger money" ratings.
Playing it safe
What's more, in uncertain times, I'd urge investors to stick with the "big is beautiful" mantra, as mega-cap firms tend to be more defensive and less volatile during the market's periodic downturns.
Hence, I like the look of mining giant Rio Tinto, which trades on just 6.5 times earnings but offers a forecast dividend yield of 3.1%, covered a generous 4.6 times. On a similar risk-reward argument, I'd add Anglo American to My Watchlist, as it trades on 7.6 times forward earnings while offering a yield of 2.3%, covered 5.5 times.
Then again, a balanced approach of investing evenly across the five lowest-rated miners in the table above could also pay off. These five have an average rating of 6.5 times forecast earnings and an average dividend of 2.6%, covered 5.8 times.
Frankly, these are undemanding fundamentals for FTSE 100 firms!
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At the time this article was published Cliff does not own any of the shares mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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