Why you might want to dump your mining shares in 2016

Credit: iStock

On Tuesday, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) finished the day down around 0.1% at 5,451 points. The decline marked the first down day out of the past nine trading sessions on the ASX.

Heading up the ‘biggest decliners’ list yesterday was Syrah Resources Ltd (ASX: SYR) which fell 11.1%. Other big decliners were South32 Ltd (ASX S32), down 4.6% and a number of gold stocks, including EVOLUTION FPO (ASX: EVN), down 2.8%.

The major miners which, given their size, have a larger effect on the overall move in the index were also all lower. Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) declined by 2.3%, 1.9% and 1.5% respectively.

The resource sector falls were in response to declines in most major commodities including oil, iron ore and gold.

Suggesting that now could be the time to consider selling your mining shares was a report in the Australian Financial Review quoting well regarded analyst Mr Atul Lele who warned that commodities are heading into another bear market.

It’s a worrying call for investors exposed to the resource sector as it suggests that we may not have passed the bottom of the cycle yet.

According to analyst consensus data from Reuters, Rio’s earnings per share (EPS) are forecast to decline by US 3 cents per share (cps) to US$1.69 in the current 2017 financial year.

Likewise, estimates show Fortescue’s EPS sliding US 7 cps to US 24 cps in FY 2017.

Meanwhile, consensus forecasts suggest BHP’s EPS will jump from US 23 cps in FY 2016 to US 51 cps in FY 2017.

Foolish takeaway

Investing in a cyclical company near the bottom of an earnings cycle can lead to strong returns for investors.

There’s little reason for that investment premise not to be the case for the current commodity cycle, however, picking the bottom of this cycle could be tougher given the ‘once in a generation’ mining boom that we’ve just experienced.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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