With China cutting its interest rates in an attempt to boost its economic outlook, mining stocks are a little more popular than they were a few weeks ago. Furthermore, the prices of commodities such as iron ore have stabilised somewhat and, for the first time in a number of months, there is a degree of optimism surrounding the sector.
This optimism, though, could be misplaced. After all, there remains a severe lack of demand for a range of commodities and there is a long way to go before their prices reach anything close to previous highs. And, moving forward, it seems likely that there will be continued volatility in the share prices of mining companies, which is not a preferable situation for most private investors.
However, for those investors who can take a long-term view and accept a significant amount of uncertainty, the likes of Rio Tinto Limited (ASX: RIO) and Newcrest Mining Limited (ASX: NCM) hold considerable appeal.
In the case of Rio Tinto, it is pursuing a strategy of increasing production so as to lessen the impact of a lower iron ore price. This not only gives profitability a boost, it also means that Rio Tinto's market share is positively affected which, in the long run, could lead to profit gains. And, with Rio Tinto successfully able to slash its costs (for example it is aiming to cut operating costs by over $1bn in the current financial year), its market share and position relative to its peers could be strengthened over the medium to long term.
Rio Tinto also appears to have a sensible approach to exploration spending and capital expenditure. It has mothballed projects which are unlikely to be economically viable unless the price of iron ore stages a remarkable comeback, but has also ensured that it is investing sufficient capital in its existing operations to ensure they remain competitive relative to its peers.
So, with capital expenditure totalling $1.2bn in the first half of the year, it seems to be positioning itself prudently for future growth. And, with its shares having a price to earnings (P/E) ratio of 16.1, it appears to trade at a fair price given that the ASX has the same rating.
Similarly, Newcrest Mining underwent considerable restructuring in recent years which included major cost savings. This has put the company on a stronger financial footing and, even though the price of gold has disappointed in 2015, Newcrest is still forecast to grow its bottom line at an annualised rate of 6.7% during the next two financial years. Moreover, with its shares trading on a price to book value (P/B) ratio of only 1.2 versus 1.3 for the ASX, there is clear upward re-rating potential.
Furthermore, with the outlook for the global economy being uncertain, investing in gold mining companies such as Newcrest makes sense. That's because, as was the case in the global financial crisis, gold is seen as a store of value and a relatively appealing asset to hold during a recession. And, while the global economy appears to be in better shape than it was a handful of years ago, the prospect of monetary policy tightening in the US could cause confidence to decline and push gold prices (and the share prices of gold miners such as Newcrest) considerably higher.
