Why it's time to turn bullish on miners
After four years of sector underperformance due to oversupply and a lack of demand, miners present a buying opportunity in 2014, according to analysts.
"Looking ahead, the downside risks seem to be diminishing and overall we feel that the big shocks that we've seen over the last two or three years are done and dusted and an environment of greater stability is certainly conducive [to better commodity prices]," Marc Elliott, mining analyst at Investec, told CNBC on Monday.
"Companies have been focusing on their supply-side efficiencies to a great degree - that's a key message from the big players. They're talking about operational efficiencies, reducing the capital budgets and overall returning value to shareholders," he told CNBC's "Worldwide Exchange."
"Companies can focus on higher grade, lower-cost production -- admittedly at the expense of volume which is also supportive of commodity prices," he added.
His comments are moot points for the mining industry which has come under pressure over the last few years on the back of a decline in demand from China and a glut in supply. Both these factors have combined to weigh on miners' profits.
Last year was the fourth in a row for underperformance for general miners relative to the Johannesburg Stock Exchange (JSE) All-Share Index, according to analysis by Renaissance Capital published on Monday, which noted that "mining companies underperformed despite reasonably favorable commodity prices and producer currencies, as poor capital allocation, high mining inflation and production disappointments eroded free cash flow."
(Read more: End of boom? Not forAustralia's iron ore miners)
But the analysts behind the research, Johann Pretorius and Steven Friedman, said that although they maintained their long-term bearish stance on miners, some "may present a short-term buying opportunity in 2014."
The seeds were being sown for the next commodity bull market, Pretorius and Friedman said in a note published on Monday, as few new mining projects and higher construction costs "starved the market of new supply." In sum, "we think slower supply growth will eventually support higher prices," they noted.
(Read more: No 'Armageddon'for miners: Western Australia Premier)
Furthermore, they said, commodity prices may have bottomed out as the global economic outlook improved.
Among the other reasons cited for their bullish stance, Pretorius and Friedman said "margins have declined to normalised or even depressed levels for most miners (excluding iron ore producers], presenting limited further earnings downside risk, in our view."
In addition, the weaker exchange rate seen in countries that mine and produce raw materials – such as South Africa and Brazil -- and an industry focus on shareholder value and dividends also "reduced the risk of further value-destruction through poor capital allocation."
Capital expenditure over the last five years, meanwhile "will finally result in volume growth, supporting earnings and free cash flow growth for some miners," they said.
They had "buy" ratings on BHP Billiton, Rio Tinto (which they upgraded from a "hold" rating) and African Rainbow Minerals. They maintained their "hold" rating on Anglo American, Exxaro and Assore and their "sell" ratings on Glencore Xstrata and Kumba Iron Ore.
RenCap's analysts are not the first to signal a change of mood over the resources sector as a result of a better global growth and industry fundamentals. Last week, analysts at City moved their 12-month view on the mining sector to be bullish for the first time in three years.
However, one of Citi's emerging market strategists told CNBC he was still cautious. "Irrespective of Chinese growth data, we are in an environment where commodities in general will be under some downward pressure," Luis Costa toldCNBC Europe's "Squawk Box."
(Read more: Commodity currencies: Time to buy?)
"There have been a pretty nice move in 2013 in general in some of the commodity families but if you look into the supply-demand balance out there all across the board it's still suggesting some downside."
- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt.