Valuations (measured by share price to earnings) are approaching levels last seen in the first quarter of 2009, when the industry was plagued by questions about how it would fund further mining and exploration as credit lines threatened to dry up and some companies looked at risk of breaching their banking covenants.
There is also the growing threat of resource nationalism, shown in Argentina moving to seize control of YPF, part-owned by Spanish energy company Repsol. The cost of oil is also hiking the cost of production across the board.
With the Stoxx Europe 600 Basic Resources close to 20 percent lower than its recent highs, analysts at Deutsche Bank believe it is time to buy on weakness in the sector. They argue that the index usually pulls back by about 15 percent to 25 percent during its bull market declines, which suggests that it is now close to the bottom.
“Natural resources have lagged other sectors such as autos and chemicals which already had good recoveries in earnings momentum. Miners earnings are showing early signs of troughing,” they wrote in a research note.
Worries about growth in China, now the world’s biggest economy and one of its fastest-growing markets for resources such as metals and coal, are overdone, according to Deutsche Bank. The analysts recommend buying Rio, or September options on the Mining and Basic Resources Index, to give time for the sector to rally.
Andrew Latto, senior analyst at Fat Prophets, points out that iron ore prices and copper prices holding up well. Fat Prophets recommends buying Rio as well as BHP Billiton and Anglo American, and has a hold recommendation on Xstrata, which is in the process of being taken over by commodities trader Glencore in one of the biggest London-based mergers of recent years.