You must dig for a gem to invest with miners

AFTER months in the doldrums mining company share prices are staging a turnaround – but will it last?

For years the price of oil and metals consistently climbed and commodity firms were among the strongest performers in the market.

Share price growth and meaty dividends made them an investor favourite. But then commodity prices plunged.

The boom in shale oil production in the US and the decision by oil cartel Opec to increase production of the black stuff led to a glut of supply. A fall in demand as growth in China and Europe slowed also took its toll.

Oil fell from around $115 a barrel in the summer of 2014 to less than $50 a barrel before the end of the year. It reached a low of $26.21 a barrel in January this year. Metal prices were also clobbered.

Copper – known as ‘Dr Copper’ by traders because it serves as an indicator for the health of the global economy – plummeted to a six-anda-half year low early this year.

And then, suddenly, the tide began to turn. Shares, which had been hammered over the previous 15 months, started to claw their way back.

Figures from Panmure Gordon show just how well some of the oil and mining companies have done.

Since the start of the year the share price of Lonmin is up an incredible 496pc, Anglo American has soared 288pc and Evraz 146pc.

But is this a true turnaround or simply a short-term reprieve?

Tom Becket, chief investment officer at Psigma Investment Management, says: ‘You have to put these share price moves into context. Anglo’s share price had already fallen 90pc.

‘But there is still a good long-term opportunity in some of the biggest names; many of these companies have taken their medicine, shored up their balance sheets and can still pay a dividend.’

True, many of these shares have climbed impressively, but from a low-base point relative to their history. Anglo American reached a share price of £29.10 in February 2012; by January this year it was down to just 226p a share. Despite its meteoric climb in recent months, it is still around 70pc short of that peak price.

Antofagasta topped out at £13.99 a share at the same time and had plunged to 350p by January this year. Today is has recovered some of that ground but at 541.5p a share is around 60pc from its peak.

And experts say that despite having fallen so far, many miners won’t see their share price rally any further.

One of the main reasons for that is because their fortunes are intrinsi- cally tied to the price of oil and other commodities.

When prices are low, only those with the strongest balance sheets can weather the storm. That puts smaller companies and those in the exploration phases at a severe disadvantage to the giants.

Becket says it’s the bluechip names such as BHP Billiton and Rio Tinto which will do well in the coming months.

‘I think it will be very much a case of the winner’s will win and the losers will fail badly,’ he says.

That’s because most experts don’t think the sudden swing in sentiment to the sector will continue.

Opec has so far not made any moves to cut oil production so the oversupply still exists which means prices can’t grow.

The other fundamental factors – slowing Chinese demand, increasing Shale production, an uncertain global economy – have not changed either.

Becket says: ‘The only way prices could get up to $100 a barrel again would be if there was another oil sell off, companies couldn’t make profit and there were bankruptcies; that would lead to undersupply. It seems unlikely right now.’

Angelos Damaskos, manager of the Junior Oil Trust which is up 13pc over one year but down 51pc over three years, says: ‘I think oil will be in this $40 to $50 a barrel range for a while now.

‘Oil companies have seen a significant change of sentiment and some of them now look slightly overpriced.

‘We will focus on the smaller firms which are producing and profitable and which have solid oil reserves, not those which are just in the exploration stages.’

Becket likes the First State Global Resources fund, which invests across a range of different commodity areas including mining, energy and metals which helps make it less risky.

It is up 50pc over the past year, but down 25pc over five years.

Laith Khalaf, senior analyst at Hagreaves Lansdown, says: ‘The mining industry is regularly to be found in a state of feast or famine, such is its dependence on commodity prices which wax and wane with global economic growth.

‘That being the case, investors will need to be willing to stomach volatility and try to avoid buying at the sector’s peak.’