According to a Citi Research report on the mining sector published Wednesday, the upcoming 2013 earnings season “is likely to be critical in defining the year ahead.” Citi Research analysts Heath R. Jansen et al. suggest that all of the fundamentals and technicals seem to be lining up for a bull run in European mining stocks. as long as balance sheets keep improving as management continues to sweeten the sweeten the pot for investors with stock buybacks and dividends.
Show me the cash
Given relatively high commodities prices over the last 12 months, Jansen and colleagues expect 2013 mining sector earnings to be strong and a likely catalyst for further share price appreciation. “We are forecasting the large mining companies to report strong YoY increases in cash flows, rising from a negative US$13.1b (aggregate of big 4 miners) in 2012 to a positive US$14.7b in 2013. Citi is expecting mining managements to reaffirm their prudent capex plans with overall expectations of a cut back in capex of 16.2%.”
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Mining stocks: Dividend increases and cost reductions
Improved cash flows and reduced capex means cash is piling up fast at mining companies. The Citi reports suggests that companies will be distributing a good chunk of that cash via increased dividends. The analysts also highlight the possibility of reduced costs also providing positive momentum. “We are expecting an aggregate dividend growth of 5.9% y/y with the highest growth from Rio Tinto plc (ADR) (NYSE:RIO) (LON:RIO) (+10.8%). Costs could provide upside, with the mining companies focusing on cost we think that we could see upside surprise against expectations especially coupled with EM currencies, the biggest upside surprise could be in BHP Billiton Limited (ADR) (NYSE:BHP) (LON:BLT).”
Citi picks in Euro mining sector
Jansen and his Citi Research colleagues are generally bullish on the large cap Euro mining sector. Their top buy recommendation is Rio Tinto plc (ADR) (NYSE:RIO) (LON:RIO), and their least favorite company in the sector is Anglo American plc (LON:AAL).