Top 3 Picks in the Mining Sector

Equities Mentioned in this Video

Rio Tinto (RIO)
BHP Billiton (BLT)
Antofagasta (ANTO)

Market Performance (September 17 - 21)

FTSE 100: -1.06%
FTSE 250: -1.37%
FTSE All Share: -1.09%
FTSE Small-Cap: -0.26%
FTSE AIM 100: +0.87%
FTSE Fledgling: +0.55%

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Video Transcript:

Alanna Petroff: The mining sector as a whole has been experiencing some weakness these days, however, now could be a good time to get in. Morningstar columnist Rodney Hobson has been looking at the mining sector and he joins me now.

So, Rodney, now let's talk about mining and why you're interested in mining right now?

Rodney Hobson: Mining is a big hole in my portfolio. Over the past four or five years, during all the economic crisis, I've concentrated on solid defensive companies that can be relied on to perform okay, but not spectacularly. Now mining doesn't fit into that, mining is much more a cyclical industry, depends very heavily on how the world economy is going, so I have avoided it.

However, at this stage, with share prices falling in the mining sector and dragging the FTSE 100 Index down with it, I feel that perhaps it's time to take a look. Maybe we can see the mining sector in a new light. When all is said and done, there is still growth in the world. There is growth in Asia. We in the West tend to forget about Asia and worry that we're not getting anywhere in the developed world.

Asia contains China and India, two countries in which, between them, have a third of the world’s population. So, there is enormous scope there and these people are going for consumer products. I think that we're going to see growth continuing in Asia and it's at our peril that we overlook it.

Petroff: But of course the growth and the demand in Asia for mining is going down a bit. You’re still happy with that?

Hobson: I'm still happy. You see, what we're talking about in Asia is a tailing off from 10% growth. We're still getting growth in Asia, 5% growth is seen as rather poor, whereas here we'd be absolutely delighted with it. So there is still some growth there and Asia is going to keep going. Remember also that in India and China, there is a third of the world's population, so even modest growth out in Asia translates into tremendous growth, certainly tremendous potential growth, for the mining sector.

Petroff: Okay. So now there are three mining companies in particular that you’re looking to load up on right now. Let's go over those. That's Rio Tinto, BHP Billiton and Antofagasta.

Hobson: Well, the three companies I’ve chosen are the ones that stand out greatly. One thing that does concern me about mining is that I don't want to get involved with companies based in Eastern Europe, where we have issues over corporate governance and political risks. So we do need to look in mining at companies that are outside political risk. I think that’s very important.

Rio Tinto is a good stable company. It's got very good cash flow. It's got a good wide range of products. It pays a good dividend. Its markets are mainly Australia, North America, Europe, and although those aren't the big growth – economic growth areas, they are very solid politically. So that does make it an attractive company.

Petroff: BHP, let's move on to BHP.

Hobson: BHP, likewise good range of products, good solid growth, the P/E is higher than for Rio, so the shares don't look quite as cheap. On the other hand, the perspective yield is a little higher, so I think that that is factored into the share price. I think that BHP has great prospects.

These two companies have been involved in great competitive battles and BHP did attempt to take over Rio Tinto. I'm glad that's all out of the way and I think that both companies have great prospects. It's going to be very hard to choose between the two.

Petroff: Now Antofagasta, that's a little bit different than the other two. Why this company?

Hobson: Yes, Antofagasta is quite different. First of all, it's really into one metal: copper. It's also based in Chile. It's very heavily into one country as it were, although its markets are elsewhere. So, I regard Antofagasta as a little riskier. It was a great stock market darling when it first listed; it's tailed off quite heavily. 

What does attract me is that its results were better than expected in August, dividend was increased 21%. Again, it's a decent yield. The P/E is a little higher, is into double figures, so the shares don't look as cheap and it is riskier. But, I'm not adverse to having a bit of risk in the portfolio, it's a very solid portfolio that I have, so maybe that would spice it up a bit. 

It's a hard choice between these three companies, but I think all three are worth looking at.

Petroff: Okay. Thanks very much. That was Rodney Hobson. I'm Alanna Petroff and thanks for watching Morningstar.