‘Indiscriminate Sell-Off’ in Miners Creates ‘Bargains’
Investors have dumped mining shares this year with a drumbeat of bad news weighing on sector, from weak Chinese data to a supply glut in some metals.
The Stoxx Europe 600 basic resources sector (SXXP) has fallen 26 percent from the peak in January and 46 percent over the last 24 months, losing out to the broader equity market which is up almost 5 percent year-to-date.
But amid the rout, some investors and analysts are now seeing plenty of opportunities.
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"The sell-off year to date has been really indiscriminat. You have got a lot of companies that have strong cash flows at lower prices that really look good value at the moment," Catherine Raw, portfolio manager on the natural resources equity team at BlackRock told CNBC on Friday.
She said dividend-paying mining companies were now looking very cheap.
Her pick of the sector at the moment is mid-cap copper stocks. "Copper looks the most interesting because you are seeing some of the supply side tightness showing signs of tightening the overall market. A number of big mines have had some real problems year-to-date, there has been scrap tightness and copper hasn't suffered on the demand side in the way we have seen in the other commodities," she said.
Clive Beagles and James Lowen, equity income managers at JO Hambro Capital Management have recently added to the resources sector for the first time since 2009 on the view that cash flows will improve and dividends will increase.
One factor that could help mining companies recover is that production costs have fallen.
"The cost bases of the mining companies are benefitting from a fall in commodity-based currencies, with the [Australian dollar] weakening by around 10 percent and the rand by around 18 percent over the past 12 months," analysts at Citi led by Heath Jansen said in a report on Friday.
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The Citi analysts increased their short-term stance (6-month view) on the European metals and mining sector from bearish to neutral on Friday.
Still, Christoper LaFemina at Jefferies pointed out that the sector wasn't in "deep value territory yet", though he said some opportunities in the sector had emerged. He recommended buying shares in BHP Billiton, Rio Tinto, Glencore Xstrata and First Quantum.
(Read More:'Ridiculously Bearish for Miners': Gartman)
"In the case of BHP and Rio, returns on equity should be reasonably high even in a lower commodity price environment, operating risk is low, geopolitical risk is low, and valuations are inexpensive. In the case of Glencore Xstrata, merger synergy upside, free cash flow growth, and dividend growth should support the share price."
"Finally, First Quantum shareholders should benefit as the company delivers its large organic growth pipeline in copper, which is one of our preferred commodities for the long-term," he added.
—By CNBC's Jenny Cosgrave: Follow her on Twitter @jenny_cosgrave