JP Morgan joins the trickle of institutions and funds eyeing the mining sector. In a note this week with a few stock recommendations, it slapped a buy (i.e. overweight) on the sector in general Monday, ending what has been a bearish view of the commodities and mining sectors.
The view has been supported by high profile investors putting their money where their mouth is. Carl Icahn bought an 8% stake in Freeport McMoRan recently, taking on one of the hardest hit among North American headquartered miners that faces a heavy debt load, but owns top tier mining assets. George Soros bought a sizeable stake in Barrick Gold, which has seen a modest pickup in fund interest recently.
JP Morgan’s argument for miners was simple: that there is little downside left in the space. Mining has been punished more harshly than most sectors in recent years on the back of falling commodity prices, of course. But JP Morgan sees commodity prices as stabilizing in the coming year or so. That, combined with the depths mining shares are plumbing, has the vulture in JP Morgan circling.
“In price relative terms, mining is back to its levels from 10 years ago, when the Chinese commodity super-cycle was just starting,” JP Morgan notes, as others have in recent months. JP Morgan may be a bit early in bottom calling – and acknowledges this – but that’s part of its argument in favour of the sector. The prevailing view of it is still bearish. Yet it sees headwinds that have long been against the mining sector as diminished now, overblown or turning about.
In particular, it takes a positive view of China, arguing the manufacturing sector and a pickup in real estate sales point to a healthy enough economy for industrials. (Here its picking of evidence may be a bit selective. It doesn’t mention that construction starts in China – more directly tied to commodity consumption – have been declining, heavily, year over year.)
As for the miners, it notes they have lowered capital spending in the past few years and that valuations are at decadal lows. And while JP Morgan says more weakness in commodities prices may yet come – but if so, probably limited – along with punishment to earnings.
“This might mean some additional EPS cuts for miners near term, but again, not a step change. We believe that the bulk of EPS downgrades are behind us given the latest consensus projections of -44% year-on-year EPS growth for miners in ’15.”
In picks, JP Morgan highlights Norsk Hydro, Rio Tinto, Fresnilllo, Randgold and Thyssenkrupp. Notably, it avoids the heaviest losers among big miners, such as Glencore and Anglo American.
JP Morgan’s softening attitude to miners comes as other high profile investors dip into the sector.