The weakness of the US dollar and better than expected economic data from China has reignited the investment case for mining stocks, with several well-known equity income managers increasing their exposure to the sector.
Ed Legget, who runs the £585m Artemis UK Select fund, has 4 per cent of the fund invested in FTSE 100 mining company Glencore, said he has been buying more of the shares over the past month.
He said: “We believe that the strong cashflows generated by the business will see debt levels move back to within their target range.
"With base metals prices also rising, cash flows should rise, providing the management with scope to add to its asset base as well as returning cash to shareholders.”
Clive Beagles, who runs the £3.3bn JO Hambro UK Equity Income fund, has been keen on mining shares for some time, but recently made a new investment in Anglo American shares.
Mr Beagles said the shares have performed exceptionally well since 2015, but he feels there is room for much more progress as rising commodity prices mean Anglo American has the capacity to generate sufficient cash to pay down the debt and pay an increase dividend.
The forecast yield for Anglo American for 2017 is 4.8 per cent.
Commodity companies are by nature cyclical, with profits tending to move broadly in line with the prices of the underlying commodities. That can make commodity stocks inherently volatile.
But Richard Turnill, global chief investment strategist at BlackRock, said that commodity companies are presently benefitting from both an increase in demand coming from China, and constraints on supply.
He added that many firms cut back on capital expenditure in recent years, which is now ensuring a deficiency of supply.
Mr Turnill said that on previous occasions when commodity prices have been on the rise, China has ramped up production, to the point when there becomes oversupply, and prices decline.
But he said in his view policy makers in China have addressed those structural problems, meaning supply will be curtailed for the medium term.
He said: “We see signs that reduced supply and increased demand may be more than temporary and are likely to help keep industrial metals prices stable from here.
"Metals and mining firms have been improving their balance sheets by reducing debt and decreasing investment in additional production capacity. Ongoing supply-side reforms in China, meanwhile, are curtailing overproduction of certain metals.”
The weakness of the US dollar benefits mining companies as all commodities are priced in dollars.
So the weaker the dollar, the greater demand is likely to be from non dollar economies. So a weak dollar effectively makes the products sold by mining companies cheaper for potential customers around the world.
David.Thorpe@ft.com
