For many investors, the idea of buying shares in mining companies at the present time seems to be a bad move. After all, the sector has declined in value during the last year as a slowing China has caused commodity prices to tumble.
However, there are a number of high-quality mining companies now trading at relatively appealing prices, thereby making it a good time to buy for long-term investors who can live with the potential for above-average volatility.
For example, BHP Billiton Limited's (ASX: BHP) share price has fallen by 24% in the last year as a result of its worsening bottom line, with earnings per share falling by 25%. And, in the current year a further decline of 68% in net profit is being forecast by the market.
Clearly, this is disappointing, but BHP's strategy looks set to pay off in the long run, with the company increasing its production to record levels and also improving productivity so as to offset some of the impact of lower commodity prices. For example, in financial year 2015 BHP delivered US$4.1bn in productivity gains, which brings their total to US$10bn over the last three years.
Furthermore, with global energy demand being predicted to rise by 30% in the next two decades, BHP appears to be well-positioned for growth. And, while some of this new capacity will be renewable, the energy supply mix in China and India is expected to be dominated by oil, coal and gas.
In addition, BHP is expected to increase its bottom line by 20% next year, which has the potential to positively catalyse investor sentiment in the stock. Meanwhile, a dividend yield of 7.1% is 250 basis points higher than that of the ASX, thereby making BHP a relatively appealing income play, too.
Similarly, gold mining company Newcrest Mining Limited (ASX: NCM) has also endured a challenging period, with its shares falling by 65% in the last five years. Despite the price of gold falling to a five-year low earlier this year, Newcrest's shares are up by 51% in the last year as the company continues to offer excellent growth prospects, with its bottom line forecast to rise by as much as 27% in the next financial year. This puts it on a price to earnings growth (PEG) ratio of 0.9 versus a PEG ratio of 1.4 for the ASX.
A key reason for this bright outlook is Newcrest's business improvement plan called 'Edge' which has allowed it to, for example, reduce all-in sustaining costs by 12% in its most recent financial year. In addition, 'Edge' has allowed Newcrest to generate $390m of cash benefits in its first full year of operation which, alongside increases in production of gold and copper means that the company's disappointing share price performance since 2010 may be well and truly at an end.
