Miners: Recovery ahead or further to fall?

Can these four stocks survive a China meltdown?

On Friday, China announced that GDP growth came in at 7.6% for the second quarter compared to the previous year, down from 8.1% in the first quarter. Industrial production rose 9.5% from a year ago, while retail sales climbed 13.7% from last year and fixed asset investment rose 20.4% in the first half of the year. Those are impressive numbers by anyone’s standards, but the issue is that growth has now fallen for six consecutive quarters, and the decline in growth is what is concerning investors.

ASX listed resources stocks have been hammered over the last year, falling much more than the S&P / ASX 200 index (Index: ^AXJO) (ASX: XJO), which itself has seen a fall of 8.1% in the last 12 months.

Our four biggest miners have all slumped by more than 25% as commodities prices fall, so where do they go from here?

Foot on the gas

BHP Billiton Limited’s (ASX: BHP) share price has crashed by more than 28% since last year. The company has announced that it won’t be approving any major capital expense projects until at least December 2012. Mind you the big miner has more than its hands full, following its acquisition last year of Texas shale gas producer Petrohawk Energy for US$14.9 billion. Analysts are expecting BHP to take a write-down of around US$5 billion on the value of Petrohawk this year, to reflect lower gas prices in the US.

Management appear to be concerned about the falling growth in China, but the company has always expressed the view that when making investments, they are not looking to next year or the year after but 20 years down the track. Investors in BHP should take a similar view. Yes, there will be down periods, but BHP continues to generate significant cash flows from its petroleum and mining divisions. The company is not overly reliant on China’s demand, having expanded significantly into oil and gas, and in the long run looks well placed for shareholders to benefit.

With gas likely to emerge as the natural successor to oil as one of the dominant energy sources, Petrohawk may end up looking cheap.

I’m going to Rio

Australia’s other major diversified resources company, Rio Tinto Limited (ASX: RIO) has seen its share price slump by almost 33% since last year. The company has taken a very different approach to BHP and is ramping up its iron ore projects in the Pilbara region of Western Australia and production is expected to almost double in the next few years, although Rio has recently cut back those plans somewhat. The company has also announced plans to offload its diamond mines, transforming the company further from a diversified miner into a focused iron ore miner, with some minor (excuse the pun!) non-core operations.

With iron ore now making up more than three quarters of earnings, and likely to be a higher portion in future, Rio is heavily dependent on the price of iron ore and demand from China. If the price of iron ore stays around current levels and demand doesn’t slacken off, Rio investors will be laughing.

More, more iron ore

Fortescue Metals Group (ASX: FMG) is purely an iron ore miner, and totally dependent on China’s demand for ore. Fears over falling demand and falling iron ore prices have seen Fortescue’s shares hammered down 28% in the last year. It doesn’t help that the stock is one of the most shorted stocks on the ASX, with speculators gambling the stock has further to fall.

The company, like Rio above, is also massively expanding its output and expects to triple its production of iron ore to an annual rate of 155 million tonnes from mid-2013. The company was targeting production of 355 million tonnes from 2017, but last month said it was planning to review that target, once it reached the 155 million tonnes milestone.

If all goes well, Fortescue’s current share price will look ridiculously cheap indeed and the company will be rolling in billions of cash flow each year. Citi analysts are even predicting a dividend of between 48 to 97 cents per share in the 2015 financial year, which represents a 10-19% yield based on the current share price.

The problem hanging over Fortescue is its debt. Tripling production and beyond takes billions of dollars of investment, and Fortescue is now in a race to get to 155 million tonnes before the banks come asking for their money back.

All that glitters

Shares in Australia’s biggest listed gold miner, Newcrest Mining (ASX: NCM) have almost halved in the last year, falling by 46%, despite gold falling from US$1,800 an ounce to around US$1,600 an ounce. So why has the stock under-performed so much?

Several issues have created the ‘perfect storm’ for Newcrest. Along with the falling gold price, production has also been falling, mainly thanks to bad weather. The company also appears to have a public relations issue, with constant downgrades to production guidance. Analysts believe the market is not prepared to pay for any potential future growth until management can consistently meet quarterly production forecasts.

The other issue, which seems to get many a company into trouble, is the large level of debt Newcrest carries. Should the gold price fall to US$1,440 an ounce, Macquarie analysts have calculated that Newcrest would be required to raise capital from shareholders, to avoid breaching debt covenants.


The mining and carbon taxes and an uncertain outlook for commodities prices have all affected these stocks and are likely to weigh on the share prices for some time yet. The potential good news for resources companies is that investors expect China to take further action to stimulate growth. The country cut its interest rates last week, and further cuts and stimulus action could be forthcoming.

Assumptions that India would take over from China, in providing demand for commodities has so far fallen short of expectations, and in the short-term, unlikely to change. Developing nations aren’t growing as fast as China, so are unlikely to make up for any Chinese shortfall.

The Foolish bottom line

Resources stocks are unloved and unwanted at the moment. With the falls in the share prices of these four stocks, you may think they were starting to look attractive. Should further Chinese stimulus not be forthcoming, falling commodities prices and rising iron ore production could be the double whammy that prompts further large falls in the share prices of the first three stocks, while further falls in the gold price could be devastating for Newcrest’s.

If you’re in the market for some high yielding ASX shares, look no further than our ”Secure Your Future with 3 Rock-Solid Dividend Stocks” report. In this free report, we’ve put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

More reading

Motley Fool writer/analyst Mike King owns shares in BHP. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of January 12th 2022

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »