A pedestrian passes the offices of Anglo American in Johannesburg. Anglo American, BHP Billiton and Rio Tinto record the largest gains from foreign exchange moves in a decade, according to quarterly earnings reports.
Dow Jones
Despite plunging commodity prices, investors are buying stocks of large mining companies as weaker emerging-market currencies prop up profits.
From Australia to Indonesia to Brazil, countries where most global miners operate, currencies fell by 15% to 20% against the US dollar last year, bringing down costs including local wages and expenditures on new projects and offsetting weak prices of commodities such as iron ore and copper.
That’s helped Anglo American, BHP Billiton and Rio Tinto record the largest gains from foreign-exchange moves in a decade, according to quarterly earnings reports released recently. The S&P/TSX Global Mining Index, a broad gauge of diversified miners’ performance, is up 7.07% so far this year, a reversal from a 20% drop in 2013.
“Over the last year, we have increased exposure to the mining sector as the valuations have become more attractive,” said Olivia Engel, Sydney-based head of active quantitative equities for Asia Pacific at State Street Global Advisors, which has $2.3tn under management. “Their balance sheets are in good shape, they are a good value, and they are paying out good yield.”
Ms. Engel says they are looking at “higher-quality larger miners’ and “finding more attractive opportunities there compared with eight to 12 months ago.”
Currency depreciation in many of the world’s emerging markets are a welcome relief to miners, which had scaled back spending in recent years to help protect profits as the US dollar weakened and commodities fell. Slowing growth in China, the world’s biggest buyer of commodities, was especially alarming and had pushed stock prices lower.
“Miners” earnings have been hammered for the last three years by falling commodity prices and stronger currencies,” said George Cheveley, a portfolio manager on the commodities and resources team at Investec Asset Management in London, which has $107bn under management. “The fact that we’ve got some relief now-although people say it isn’t sustainable-arguably, it was needed. It hasn’t overshot yet, we’ve just got back to what should be a more normal level.” Mr. Cheveley’s fund has increased its positions in diversified miners over the last few months, marginally shifting away from energy companies.
Analysts say foreign-exchange movements act as a natural hedge against changing commodity prices for miners, who typically don’t hedge against wild currency swings.
“Peripheral currencies have weakened relative to the US dollar, which has in fact aided the operating results of companies operating in those constituencies and has sometimes acted to mitigate the capital cost blowouts the sector has experienced for 10 or 12 years. So, we have been a beneficiary of foreign-exchange turbulence,” said Rick Rule, CEO of Sprott Global Resources fund, which has $450mn under management and is a subsidiary of Sprott Global.
“[The] renewed emphasis on mining [by investors] has to do with the extraordinary under-valuations that occurred last year,” he said.
In the latest reporting period, Anglo American saw 100% of the negative impact of sliding commodity prices on its earnings offset by weak currencies, public company data showed. Between 2002 and 2013, on average, the London-listed miner saw just 9% of commodity price moves offset by foreign exchange.
For BHP Billiton, the currency drops had more than double the impact on earnings-214%, compared to 21% historically.
To be sure, many say the current currency advantages aren’t sustainable and can’t be relied upon. In addition, iron-ore prices have continued to drop, bolstering fears of a slowdown in China, which posted a rare trade deficit last month, dragging down iron ore, copper and steel prices. On Thursday, the stock prices of Rio Tinto and BHP Billiton rose 1.8% and 1.1%, respectively, trimming losses after a sudden collapse earlier in the week when economic data and news of a bond default out of China hit commodities.
“The 2013 depreciation of the [South African Rand] was unusually large, so one would not expect that level to continue long term. It’s important to note that the $1.7bn of gains from weaker currencies were entirely offset by lower commodity prices across the majority of our portfolio,” said Emily Blyth, a spokesperson for Anglo American.
Andy Gardner, a portfolio manager and Australian natural resources analyst at AMP Capital, which has 140bn Australian dollars (US$127bn) of assets under management, said funds at his firm are underweight miners, after reducing their positions in mining companies a few months ago.
Mr. Gardner said his firm will look to increase exposure to this sector if expectations of future earnings are revised upward and iron-ore prices begin to stabilise.