In early 2016, many stocks were on their knees after a very weak metals price environment had crushed earnings and cash flows and balance sheets were in dire need of repair. Dramatic restructuring, capital raises and cost cuts ensued and with the benefit of hindsight it was a fantastic opportunity for any brave value investor to start buying (price to book multiples had fallen to almost historic lows).
With the sector more than doubling since the low (and in some stocks’ cases more than quadrupling) you might think that the value opportunity is no more. However, at the end of June 2018, using spot metals prices (and UBS research) all diversified miners have a free cash flow yield in excess of 11% for 2019 (with an average of almost 14%)1. The average Price/ Earnings (P/E) (again using spot metals prices) is just over 8x for 20191. This means the sector’s free cash flow yield is close to double that of the FTSE All-Share and is trading much cheaper than the market’s P/E of c. 13x2.
These very high free cash flow yields do beg the question as to what will the companies do with all this surplus cash? For one, we have seen the return to higher shareholder returns, both through dividends and share buybacks. But we could also start to see M&A once more as management teams look to achieve higher growth. Last week we had the news that Volcan’s bid to buy all the remaining shares it doesn’t already own in Vedanta was recommended and it would be no surprise to see more deals in the coming months and years, something which would likely share prices higher for the entire sector.
Of course, an investment in a mining company isn’t without risk as we saw recently with the news that US authorities had demanded Glencore hand over documents about its business in the Democratic Republic of Congo, Venezuela and Nigeria as part of a corruption probe. The stock fell by 8% on the day of the announcement, wiping c. $5bn from the company’s market cap3. To put this in context, the largest fine that has historically been charged by the US Department of Justice for a breach of the Foreign Corrupt Practices Act has been just under USD1bn suggesting the market’s reaction may well have been overly harsh. When you consider the valuation support of the stock coupled with the recent positive operational momentum, one could argue there is an opportunity for the brave value investor once more.
Ian Butler is portfolio manager of the JPM UK Strategic Equity Income Fund within J.P. Morgan Asset Management's UK Equity team. Read more about the fund>
1Source: UBS as at 30 June 2018
2Source: Factset and Bloomberg as at 30 June 2018
3Source: Bloomberg as at 30 June 2018
For Professional Clients/ Qualified Investors only – not for Retail use or distribution.
This is a marketing communication and as such the views contained herein are not to be taken as an advice or recommendation to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are, unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and investors may not get back the full amount invested. Past performance and yield are not a reliable indicator of current and future results. There is no guarantee that any forecast made will come to pass. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies.Personal data will be collected, stored and processed by J.P. Morgan
This communication is issued in Europe (excluding UK) by JPMorgan Asset Management
(Europe) S.à r.l., 6 route de Trèves, L-2633 Senningerberg, Grand Duchy of Luxembourg, R.C.S.
Luxembourg B27900, corporate capital EUR 10.000.000. This communication is issued in the UK by
JPMorgan Asset Management (UK) Limited, which is authorised and regulated by the Financial
Conduct Authority. Registered in England No. 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP. 0903c02a82297f85