The world’s largest miner finally caved…
Dispatch readers know commodities are in a horrible bear market. The price of iron ore, the key ingredient in steel, is down 59% over the past two years. Copper, which is used in everything from electrical wiring to plumbing parts, has fallen 36%. Lumber has dropped 29%.
The Bloomberg Commodity Index, which tracks 22 different commodities, has plummeted 44% since 2014. It hit a record low last month.
• Falling commodity prices have crushed mining stocks…
The world’s five largest miners—Anglo American (AAL.L), BHP Billiton (BHP), Rio Tinto (RIO.L), Vale S.A. (VALE), and Glencore (GLEN.L)—have plunged 68%, on average, since 2014.
Four of the five are at their lowest levels in over a decade.
• Miners have cut spending to survive…
Anglo American is closing over half of its mines. Glencore is selling billions of dollars’ worth of assets. Rio Tinto has slashed spending by $3 billion this year. Vale cut its 2016 spending budget by $6 billion.
Spending cuts of any kind are a sign that an industry is in trouble. But if you’ve been reading the Dispatch, you know we believe one type of spending cut is more important than all others: dividend cuts.
Mining executives know investors hate dividend cuts. A dividend cut often signals that a company is in big trouble. Typically, a company will only cut its dividend when it runs out of other options. Companies will often shelve new projects, lay off workers, and slash executive compensation before touching their dividends.
That’s why we’ve been following dividend cuts in the mining sector closely. Four of the five largest miners have cut dividends already. Until yesterday, BHP Billiton, the world’s largest miner, was the lone holdout…
• BHP just cut its dividend by 74%…
It was BHP’s first dividend cut since at least 2001. Like most miners, BHP is bleeding cash…
Yesterday, the company announced that it lost $5.7 billion last year…its first annual loss in 16 years. BHP’s CEO said,
We now have to recognise we are in a new era, a new world, and we need a different dividend policy to handle that.
BHP’s stock plunged 4.7% on the news. It’s crashed 75% since 2011.
• BHP set itself up for disaster…
From 2002 to 2008, the Bloomberg Commodity Index jumped 172%. BHP ramped up production during the boom to cash in on higher prices. It bought more equipment, hired more workers, and took on more debt. BHP’s debt-to-equity ratio—a measure of how leveraged a company is—has doubled since 2008.
Then commodities entered a major bust when the 2008 financial crisis hit. Commodity prices are now at their lowest levels in decades.
• The mining industry is working off excess built up during the last boom…
BHP still has too many workers, too many mines, and too much debt.
It’s not alone either. The world’s five biggest miners have laid off more than 100,000 workers since last year. They’ve slashed spending by billions of dollars.
Mining stocks are extremely cyclical. They go through big booms and busts. Although mining stocks are still in a big bust, the huge spending and dividend cuts show the mining industry is in despair…which means it’s likely close to a bottom.
Eventually, we’ll get a chance to pick up world-class miners for pennies on the dollar. However, we’re not ready to call the bottom in mining stocks yet.
• Global mining stocks have rallied this year…
The S&P/TSX Global Mining Index is up 8% this year. This index tracks companies that mine aluminum, coal, gold, and other raw materials.
Glencore has jumped 39% this year. Anglo American has jumped 46%.
These are huge gains for such a short period. But they don’t necessarily mean the bottom is in. As you can see in this chart, the recent rally looks tiny compared to the horrible bear market miners have been in since 2011.
• Gold stocks are the exception…
Gold stocks provide leverage to the price of gold. A 10% jump in the price of gold can cause gold stocks to surge 30%…or more.
The price of gold has surged 17% this year, making it the top performing asset of 2016. Gold’s big move has triggered a powerful rally in gold stocks.
• The Market Vectors Gold Miners ETF (GDX) has soared 42% this year…
GDX, which tracks major gold miners, is up 58% since hitting an all-time low last month. Unlike other mining stocks, now is a great time to buy gold miners.
That’s because GDX has “carved a bottom.” Regular readers know a stock carves a bottom when it stops falling, forms a bottom for a period of time, and starts moving higher. A carved bottom suggests that a stock is ready to march higher.
As you can see in the chart below, GDX “broke out” last month after carving a bottom.
• Today, GDX jumped another 4.9% to its highest level since May.
If gold is in the early stages of a new bull market, GDX could easily double. The best gold stocks could soar 300% or more.
GDX, like any ETF, owns both low and high-quality companies. To make the most money during the next gold bull market, we recommend owning the gold miners with the most upside.
• Louis James, editor of International Speculator, is our gold stocks guru…
Louis travels the world looking for mining stocks with the potential to rise in value by five or ten times. He visits mining projects all over the world. He analyzes rock samples. He meets management and looks them in the eye.
Over the past ten years, Louis has helped his readers double their money more than 20 times. In some cases, the gains have been much bigger. We’re talking returns of 287%, 390%, and 411%.
This year, five of Louis’ gold stocks are already up more than 40%. Two have spiked more than 60%. Those are huge gains in such a short period.
BHP’s huge dividend was too good to be true…
Today’s chart shows BHP’s dividend yield. You can see that its dividend yield jumped from about 7% to almost 13% in the past few months. Before yesterday’s dividend cut, BHP yielded 10.3%. That’s more than four times the 2.3% yield of the S&P 500.
Some investors likely bought BHP just for its fat dividend yield. They made a huge mistake.
Big dividends can be tempting. However, they can also be a sign that the market believes the dividend is unsustainable. In this case, the market was right.
BHP’s yield didn’t surge in recent months because the company increased dividend payments. It surged because BHP’s stock tanked. A dividend yield is a year’s worth of dividend payments divided by a stock price. If the stock price goes down, the dividend yield goes up.
BHP is down 9% since cutting its dividend.
Courtesy: Justin Spittler
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