Many investors steer clear of cyclical sectors like mining and commodities stocks, but I like them. While I don’t advocate trying to time the market, if you’re investing continuously over the long term, the pound cost averaging effect of buying in the dips can enhance your overall return.
Look at Rio Tinto (LSE: RIO) for example. When Chinese demand was falling back a bit and metals and minerals were in oversupply, Rio shares plunged.
The year 2015 saw a collapse from around 3,280p in early January, to 1,640p by the beginning of 2016 — you’d have lost half of your money and would have been silly to buy when the price was falling, right?
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Actually, from that low, the shares made a storming recovery and are now trading at 3,650p — helped by the firm’s ambitious share buyback programme. And if you’d carried on buying right through the down spell, you’d have hoovered up a lot of very cheap shares.
Dividend income
On top of that, there’s a 5.6% dividend yield forecast for this year, based on the current share price — those who bought around the low point are now looking at an effective yield of more than 12%.
Admittedly, over the erratic past five years we’ve only seen an overall gain of 15%, but investing in the downturn would have boosted that, and you’d have more than 20% extra to add from dividends — and that’s really not bad during a tough period for commodities.
Earnings are still expected to be erratic, with a 69% EPS rise this year followed by a 20% drop next, and a 4.7% dividend forecast for 2018 to follow 2017’s 5.6%.
Looking at forward P/E multiples of 10 and 12.3 for the two years, I really do see Rio Tinto as a long-term buy.
Stunning growth
One mining stock that has not had such a roller coaster two years is Hochschild Mining (LSE: HOC), with its shares having five-bagged since a low in January 2016.
Hochschild is mainly a silver miner, though it produces some gold too, and it’s nicely profitable. This year is actually expected to produce a fall in earnings per share, but an 81% spike forecast for 2018 would take care of that.
We’d still be looking at a P/E multiple of 20, mind, so to some extent an investment in Hochschild could be seen as a gamble on the price of silver.
Shiny stuff
Today the metal is selling for only around half its value of five years ago, though that is a comedown from the short-term peak of 2011-12, and over the longer term, the price does seem to be trending upwards. With silver currently at around $17 per ounce, and with Hochschild able to produce the stuff at an all-in sustaining cost of around $12.50, any upwards movement could gear up profits nicely.
Production looks to be growing strongly, with the company having achieved record levels in the third quarter, and still on track to meet its target of 37m ounces for the full year.
Chief executive Ignacio Bustamante spoke of “good cash flow generation and a planned debt refinancing in the first quarter of next year.”
What about the dividend? Well, we should only expect a 1.3% yield this year, but that’s strongly progressive and should be up to 1.5% in 2018 — and I see that progression continuing into the long term, which could easily provide attractive effective yields on the current share price.
