copper in shanghai declines after china raises exp, page-10

re: watch bhp test 2680 The Times October 28, 2006
Miners seem pricey despite soaring worldwide demand

NO OTHER SECTOR is performing quite like the miners and while shares have grown in value as fast or faster than the best for the past five years, the record in the past 18 months is little short of incredible.
In the early years of the century mining shares were bouncing back after having been sidelined as unexciting “old economy” slow coaches. Part of the long-term outperformance of mining stocks, therefore, can be attributed to the unwinding of anomalous underpricing. Such has been the growth in the last year and a half, however, that there must at least be a risk that mining stocks are now anomalously overpriced.

A £1,000 sum invested just five years ago in a basket of London listed mineral extraction shares would be worth £3,500. A similar sum invested in a FTSE 100 tracker fund would be worth only £1,500. More than half that growth has come in the last year and a half, however. Since April 2004, mining shares have doubled in value, outperforming the average three times over.

So is there any value left in the mining shares? If you glance at the p/e ratio data you could easily jump to the conclusion that there is. The average p/e ratio for the sector over the last five years is 13. At present, however, the sector sits on a multiple just under 10.

It is worth having a second look at the data though. While a low p/e ratio often suggests that shares are cheap, it may also reflect a fear that earnings will slow down. It may also be that p/e ratios seen over the past five years have sat at inflated levels because growth that subsequently materialised was being correctly anticipated.

The current relatively low p/e ratio is partly influenced by the introduction of emerging market miners such as Kazakhmys, the company from the former Soviet satellite state Khazakhstan. Shares in these — despite the fact they have recorded some of the most impressive price rises in the sector in recent months — sit on low p/e multiples. According to Thomson Datastream, the stock-market data provider, the historic p/e on Kazakhmys shares is 11. Antofagasta, the Chilean copper miner, sits on a multiple of 9. These companies are immersed in emerging market risks: awkward questions hang about standards of corporate governance, exposure to currency risks, and whether time proves that Western shareholders find that their ownership is not all that they appear.


If you examine the dividend data, mining company shares look unequivocally expensive. The six-year average for the mining sector is 2.7 per cent, which in itself is a good deal lower than the 3.1 per cent norm for all London listed shares. At present, mining sector dividend yields sit 40 per cent below the five-year average. They yield half of what has been typically paid by all FTSE shares since since 2001.

Earnings growth at the eight FTSE 100 miners listed is higher than the blue chip peer group and that may mean that miners deliver better than average dividend growth. But, according to Hemscott, which collates a wide range of data on stock market companies, miners’ earnings will grow at 8.7 per cent in the coming 12 months, and that is only 0.9 percentage points higher than all FTSE 100 firms.

The share price strength is not wholly unjustified. If the prices of metals continue to rise the companies will not even need to raise output to deliver enhanced shareholder value. Moreover, it is easier to see demand from emerging economies such as China continuing rather than fading. The best hope for political stability in the emerging nations will come if standards of living advance.

Consumption per head of population is also likely to grow as the emerging economies grow: you only need to compare the consumption rates per head of population between the US or China or India to recognise that. Miners also seem to have adopted