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Tide turns for miners as trading, earnings point to further gains

As recently as just a month ago, mining and commodity stocks were among some of the most unloved companies to own, with investors indiscriminately selling the sector.

But trading momentum and deeper analysis of some of the biggest names most recent earnings reports are now pointing to fresh support for mining stocks, as stocks surged as much as 5 percent on Friday to the top of benchmarks.

Amy Coopes | AFP | Getty Images

"Forget whether the market has gone up or down, what investors have owned –i.e. quality versus value has been extreme in term of positioning," said global head of equity trading strategy at Citi, Antonin Jullier.

"So what we are seeing in the last few weeks is selling the pharmas to buy energy or selling quality names to buy the miners," he said.

Mining stocks surged on Friday, with FTSE-listed Glencore, Anglo American, Antofagasta and BHP Billiton all trading over 4 percent higher, as copper prices rallied to a four-month high.

This bounceback follows a set of torrid earrings reports from the sector last month. Rio Tinto posted its worst set of underlying earnings for 11 years, slumping to a net loss for 2015, and scrapped its progressive payout policy -- whereby pay-outs rise or stay the same each year.

Rio's dividend for 2015 was the same as last year, but from 2017, returns to shareholders will be based on how much profit the company is making.

Peer BHP Billiton suffered a credit rating cut from ratings agencies Moody's and Standard and Poor's this week after the Anglo-Australian miner recorded a $5.67 billion first-half loss due in part to a massive writedown of U.S. energy assets.

Market fears of the anticipated change to dividend policy sent shares in the company to a 10-year low at the start of the year.

But it is this change in payouts, along with aggressive cost cutting measures that marks a "sea change" for the sector according to Investec analyst, Hunter Hillcoat.

"Both companies (BHP Billiton and Rio Tinto) are implementing material changes that have profound impact on their forward cash flows. The new dividend policies could save BHP Billiton and Rio Tinto Approximately $4.2 billion and $2.2 billion per annum respectively," Hillcoat said in a note to investors on Friday.

The ongoing debt reduction should also ensure a positive ongoing outlook from the credit ratings agencies, he said.

Jullier said the difference in valuation between quality, or defensive firms such as pharmaceutical companies and consumer staples and value companies, or energy, mining or banking stocks has now reached record levels.

"If you take the cheapest 10 percent of quality, the spread to the most expensive 10 percent of value has never been wider. And we think it is probably a reflection of some of the macro worries, and Quantitative easing flows and so on. This gap has opened so much in terms of valuation and therefore positioning, that we think some normalization is due," he added.