Compound Income
  • Blog
  • Scores
    • Subscribers Scores Access
  • Portfolio
    • Table of Returns
  • Resources
    • Check list
  • About
  • Contact



Digging deep for value and yield.

13/8/2015

2 Comments

 
Or a contrarian idea for you. Now it cannot have escaped your attention that commodity prices have been under pressure for a while now with the oil price halving last year for example. This has also been the case for industrial commodities like copper, iron ore and also gold too. The net effect of this has been pretty disastrous for the oil & gas and metals and mining sectors.

Indeed we saw further falls in the mining sector yesterday, along with the rest of the market as it happens, but this took the sector down to lows last seen at the depths of the crisis in 2009. This has stirred some contrarian interest on my part, so I thought I would do some digging of my own and share with you what I have dug up.

Picture
Here is a ten year chart for BHP Billiton (BLT) which is something of a bell weather for the broader mining sector given its diversified nature, although they have focussed a bit more recently with the disposal of some non core assets via the demerger of South 32. As you can see it is not quite back to its lows of 2009, probably reflecting the slightly better quality of their operations versus the sector overall.

In terms of its rating it currently stands on nearly 20x for the year to June 2016 with a big decline (more than halving) of earnings already baked into the forecasts. Despite this the dividend is forecast to be up by 5% this year before being flat may be in 2016 despite cover collapsing to less than 1x next year. Thus there could be a risk of a dividend cut which the 7% or so yield is starting to factor in, although their dividend policy form the report and accounts is as follows. "We have a progressive dividend policy that seeks to steadily increase or at least to maintain the dividend in US dollars at each half-yearly payment." I note they did maintain their dividend during the last downturn in 2009, although they had much greater levels of cover as mining was still in the midst of its so called super cycle back then.

Talking of which I read an interesting article the other day which suggested that the mining sector or rather demand for industrial commodities is really reflecting the reality of underlying economies, demand and supply balances and deflationary pressures. Whereas financial markets are in their own super cycle these days being boosted by liquidity from central banks and resultant demand for financial assets. Thus ironically the miners might be better able to withstand a withdrawal of central bank liquidity and rising interest rates than other sectors as that might then indicate a more sustainable pattern of growth in the world which could be good for commodities.

Any way I digress lets get back to digging for value and yield. An alternative to BHP Billiton would be Rio Tinto (RIO) another diversified mining group. They actually look better value on around 16x this years earnings although their yield is lower at 5.6% to 5.8% as their cover is expected to remain above one and there may therefore be less risk of a dividend cut. Failing that if you are a gold bug and wanted to get really speculative you could always check out a Zimbabwean Gold miner - Caledonia Mining (CMCL) which has reported first half results today, although the recent fall in gold price makes that one less attractive now.

But as Status Quo sang - Is there a better way? Well regular readers will know I am a keen on investment trusts (as well as music) and there are a few ways you can play the sector via these. One I would highlight is the biggest most liquid play in the sector - BlackRock World Mining (BRWM) which has a market cap. of over £400m and stands at a discount of around 7% or so to its estimated Net Asset Value. So not only can you pick up a diversified portfolio of miners (if you want to) at a discount (including 10% or so in both BLT & RIO) but you also get a yield of 8.5% based on the current 21p dividend and a 245p share price.

Now that dividend is not cast in stone as the dividend from this one has been quite variable over the years (see page 7 of the report and accounts) and they did last cut it by nearly 14% back in 2009. in recent years they have introduced more of a focus on delivering a yield, although this did mean they messed up a bit by getting too heavily into some royalty schemes which didn't work out so well. Putting that to one side though the other attractive feature is the fact that they have revenue reserves (which can be used to pay and smooth dividends) equivalent to about 140% of the cost of the dividend. So if the manager and the board do their job then barring a complete collapse in mining dividend generally then they should at least be able to maintain or only slightly cut the dividend again.

Summary & Conclusion
So in summary the attraction here is that you can get a professionally managed and diversified portfolio of miners at a discount, plus a bit of gearing (12.5%) and with a yield that is greater than some of their main holdings and arguably better covered given the revenue reserves. Quite useful if you don't have the desire or inclination to get your head around metal prices and commodity cycles, but would like some longer term exposure as part of a diversified portfolio. If you did - then this seems like a good way to get it. The other reason to think about it now is on a contrarian basis as the sector has done so badly for the last six years or so and the yields available seem to indicate some value. However, as ever with investing no guarantees that it won't get worse and that the dividends and share prices could go down as well as up etc. but certainly one to put on the watch list. Personally as I was in need of some losses to offset against some of my gains I sold my BHP Billiton and stuck the proceeds into this for the reasons stated above.

Any way if that has whetted you appetite you can check out their site at the link in the name of the trust above where you'll also find a copy of their annual report and fact sheets etc. If not (did I mention I like music?) as a reward for getting this far, I'll leave you with some music, which hopefully you'll enjoy, as it is a fine album appropriately called After The Gold Rush by good old Neil Young.

2 Comments
catflap
13/8/2015 08:56:11 am

The problem with the miners is that their fortunes seem highly correlated to the chinese economy, which looks like it is going to get a whole lot worse before better.

I see BLT 2016 revenue forecasts matching the numbers of 10 years ago, so there must be a good chance that share prices will also touch 10 year lows unless metal prices recover.

My vague calcs suggest that it has traded on 11x earnings in the past, so i think the downside risk is 40% off the current share price, given broker forecasts of 57p 2016 earnings.

I hasten to say that i am no expert at all; but it is a possibility in my view.

Btw. Enjoy reading the blog.

Oh, and I prefer Neil Young's Rockin' in the Free World.

Reply
Jamie link
13/8/2015 01:20:42 pm

Hi Catflap, thanks for sharing your thoughts on this. Indeed the miners have been largely driven by growth in China historically, but I guess this may be somewhat less in the future as the Chinese economy matures. I think a quite a bit of the weakness in commodity prices has already factored this in, but it certainly looks as though share prices could still go lower. I wouldn't be surprised to see BLT testing the £10 level but I'm not sure it will go down as far as you suggest as often at the bottom of the cycle they end up on higher ratings as the market discounts the trough, but time will tell I guess.

As for Neil Young - Rockin' in the Free World is indeed a good one of his although one of my all time favourites it also Like A Hurricane which also seems appropriate for the storm currently blowing through the sector.

Cheers, Jamie - glad you enjoy the Blog.

Reply

Your comment will be posted after it is approved.


Leave a Reply.

    RSS Feed

    Archives

    May 2022
    April 2022
    March 2022
    February 2022
    January 2022
    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    August 2019
    June 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014

    Categories

    All
    32Red
    Aberdeen Am
    Admin
    A G Barr
    Airtel Africa
    Alliance Pharma
    Alternative Telecoms
    AMEC
    Amino Technologies
    Amlin
    Anglo Pacific
    Ashtead
    Asset Allocation
    Auto Trader Group
    Barclays
    BA Systems
    BATS
    Behavioural Finance
    Bellway
    Berendsen
    BHP Billiton
    Bloomsbury Publishing
    Bodycote
    Books
    Bovis Homes
    BREXIT
    Britvic
    Caledonia Mining
    Capital Ltd.
    Catlin-group
    Central Asia Metals
    Centrica
    Character Group
    Churchill China
    Cineworld
    City Of London Investment Group
    Clarkson
    CMC Markets
    Commercial Property
    Compound
    Computacenter
    Connect Group
    Croda
    Currencies
    Demographics
    Diageo
    Diploma
    Directors Dealings
    Dividends
    DotDigital
    Easyjet
    Economics
    Emerging Markets
    Emis
    Empiric Student Property
    Etfs
    Fairpoint
    Ferguson
    Ferrexpo
    Finsbury Foods
    Food Retailers
    Forterra
    Games Workshop
    Gateley
    Go Compare
    Goid
    Greene King
    GSK
    Hargreaves Services
    Hays
    Headlam
    Hedge Funds
    Hikma Pharmaceuticals
    Hill & Smith
    House Builders
    Howden
    HSBC
    IG Group
    IMI
    Imperial Tobacco
    Indivor
    Inflation
    Insurance
    Intermediate Capital
    Interserve
    Investec
    Investment Trusts
    It
    ITV
    James Halstead
    Jarvis Investment Management
    JLT
    Jupiter Fund Management
    KCOM
    Kingfisher
    Legal & General
    Lloyds Bank
    Luceco
    Macfarlane
    Maintel
    Man Group
    Market Timing Indicator
    Market Valuation
    Marston's
    Matchtec
    Media
    Merlin Entertainment
    Micro Focus
    Mining
    Mitie
    Miton Group
    Moenysupermarket
    Mondi
    Moneysupermaket.com
    Morgan Sindall
    Music
    National Grid
    N.Brown
    News
    Next
    Nichols
    Norcros
    Oil
    Page Group
    Paypoint
    Pennon
    Persimmon
    Personal Finance
    Pharmaceuticals
    Phoenix Group
    Photo Me
    Photo-Me
    Plus500
    Podcasts
    Polar Capital
    Politics
    Polymetal
    Portfolio
    Portmeirion
    Provident Financial
    PZC
    Qinetiq
    Ramsdens Holdings
    Rank Group
    Reckitt Benckiser
    Renewable Energy
    Renew Holdings
    Renishaw
    Research Papers
    Restaurant Group
    Retailers
    RIO
    RM Group
    Rolls Royce
    RPC
    RPS
    Safestore
    Sage
    Sainsburys
    Savills
    Schroders
    Scores
    SCS Group
    Sell Discipline
    Shareholder Yield
    Share Picks
    Short Interest
    Somero
    Spectris
    Sprue Aegis
    SSE
    Stock Spirits
    Strix Group
    S & U Plc
    Sureserve
    Sylvania Platinum
    TalkTalk
    Taptica
    Tax
    Technology
    Telecoms
    Tobacco
    Trading Ideas
    TSB
    TUI
    UK Market Update
    Ultra Electronics
    Unilever
    Utilitywise
    Value
    Victrex
    Vodafone
    VP.
    Water Utilities
    Watkins Jones
    WH Smiths
    William Hill
    Wynstay
    XL Media
    XP Power
    Yield
    Zytronic

    googleda4a17cac6d02bb9.html
    File Size: 0 kb
    File Type: html
    Download File

Powered by Create your own unique website with customizable templates.
  • Blog
  • Scores
    • Subscribers Scores Access
  • Portfolio
    • Table of Returns
  • Resources
    • Check list
  • About
  • Contact