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Cheap mining stocks: Ripe for picking?

As mining stocks from Melbourne to London and Toronto took another pummelling this week, some analysts believe the sell-off has gone too far.

Amid concerns that China's economy is in worse shape than anticipated a few months ago and uncertainty about when the U.S. Federal Reserve will "lift off" on higher interest rates, commodities have come under pressure, dragging mining firms with them.


Carla Gottgens | Bloomberg | Getty Images

Paul Gait, a senior analyst at Bernstein, said in a note on Wednesday that a sell-off in Glencore shares was "overdone."

Mining and commodities trading giant Glencore has tumbled almost 19 percent over the past seven days. Its London-listed shares have tanked just over 60 percent so far this year, bearing the brunt of the drubbing in mining stocks.

London's FTSE 350 mining index meanwhile has shed 44 percent of its value in the past year - reflecting the pain the sector is going through.

According to Gait, the fall in Glencore's share price has overshot Bernstein's valuation for the firm by $10.8 billion. He said that Glencore's industrial assets are "fundamentally sound" and that the firm's trading activity was a "genuine business activity that has to exist in the global economy."

Cheap down under

In Australia meanwhile, mining stocks are looking cheap as commodity prices bottom in Australian dollar terms, fund manager Charlie Aitken was quoted saying by Australian media on Wednesday.

According to Aitken, a rise in iron ore and oil prices in the past month and a fall in the Australian dollar suggested the country's commodity prices have bottomed.

The price of iron ore has risen more than 25 percent from a low of about $44.60 a ton in July. The Australian dollar meanwhile has fallen about 14 percent this year against the U.S. dollar and that means iron ore prices are higher in local currency terms.

"Overall, we continue to expect the news from China to improve over the remainder of the year, helping sentiment towards commodities to recover," analysts at Capital Economics said in a note on Wednesday.

China is the world's biggest consumer of many raw materials and it has been a key driver for growth in many emerging markets and large commodity exporters such as Australia in recent decades.

Not over yet

The preliminary China manufacturing purchasing managers' index (PMI) fell to a six-and-a-half-year low of 47.0 in September, below a 47.5 forecast by analysts in a Reuters poll, data on Wednesday showed.

As more signs of weakness in China's economy – the second biggest in the world after the U.S. – emerged, Australian mining stocks remained under pressure.

Mining giants Rio Tinto and BHP Billiton extended their falls in Australia on Wednesday, with BHP Billiton closing more than 4 percent lower.

Credit Suisse late on Tuesday cut its China demand assumptions, commodity prices and earnings estimates for the metals and mining sector heavily across the board.

"Much of this is a catch-up to current conditions, which remain highly uncertain, but until China demand and emerging market currencies find a floor, it will remain challenging to put an absolute floor on commodity prices," the Credit Suisse note said.