Mining Stocks: Further to Fall or Bargain Buys?

Slowing economy may cause mining stocks to lower

After being one of the best inflation-beating equity sectors, mining’s stocks have finally succumbed to the impact of a slowing economy. Companies are predicting that a fall in demand paired with continued labour shortages may lead to a fall in earnings in the coming months.

Rio Tinto (RIOgb) and BHP (BHP) have both warned about demand reduction following China’s underwhelming growth figures. Both company stocks have declined by 20% since the start of the year, and it’s the same story with other mining stocks such as Barrick Gold (ABX), Newmont (NEM) and Anglo American (AALI). Notably Glencore (GLEN) being one of the odds ones out, rallying slightly over the past six months.

Miners were expected to become one of the lower performing sectors as a slowing economy demands less use of commodities. Market watchers say there are further risks yet to be priced into the already declining valuations. There is likely to be volatility in the market before we see the sector reaching a floor.

Glencore (GLEN) Price Chart

Why the sector is underperforming?

The commodity super cycle which took place in 2021 benefited mining stocks immensely. Their product values grew in value overnight which was reflected in their valuations and dividend pay out rates.

As the economy has been on the brink of a potential recession, the forward-looking equity market began to price this in. Stocks in this sector are likely to see volatility in the coming months.

Miners have become more concerned after China published its slowing growth numbers. AJ Bell Analyst Danni Hewson told Capital.com: “China is one of Asia’s key growth powerhouses. We already knew that growth expectations were being pared back, but the latest GDP figure is the sort of pedestrian number one might expect from a developed Western nation. This doesn’t bode well as recession fears grow in many parts of the world, and it could fuel speculation that China’s commodities appetite may wane if economic activity is stalling.”

Rio Tinto (RIOgb) Price Chart

What does this mean for investors?

Although most of the sector is trading 20% lower, Hewson believed demand has only begun to fall, and there are still potential risks not yet priced into the market. While this plays out, the one thing investors can be certain of is volatility.

Hewson said: “Miners have been on the same roller-coaster as most stocks and the only thing investors can know for sure is volatility is unlikely to disappear any time soon.”

“Whilst recession risks are being priced in there are still a whole load of intangibles to contend with. Demand is expected to fall and many commodity prices have been sliding but the world is still upside down after covid and continued lockdowns in China are making global supply chains unpredictable.”

The fallout from the Russian-Ukraine war only adds to the uncertainty. She added: “sanctions on Russian businesses seems to have already claimed the scalp of one miner and there are others which bear watching.”

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