No. of Recommendations: 11
The miners have bottomed. True or false? That is the proposition under consideration. By way of background, for some years I have not had a miner in my portfolio having sold BHP Billiton (at a profit) after it became apparent to anyone who cared to look that the Chinese economy was slowing. There was plenty of time of course since the mining commodity cycle is a slow one.

Anyway, I had my first look at BHP Billiton and company as a buying opportunity in January 2016 but did nothing. This was in part due to being busy with more general restructuring of my share portfolio, and in part due to my relative ignorance of the mining sector. Since then I have to confess that I have not gleaned a lot from the publicly available investment sphere. So yesterday it was time for DYOR. I started with the financial data of the two miners, BHP Billiton (BLT) and Antofagasta (ANTO). These look like my kind of company, low debt (gearing) and they make a lot of money (operating margin). While I have extensively studied the company reports, I have pulled the following data from Digital Look as of last Friday's close of business.

Antofagasta (ANTO):


Share price is 517p and is 49% above the market low of 346p in January 2016.
So the (current) share price has dropped 68% in the five years from £16 in January 2011.

In the five years to December 2016, pre-tax profits will have dropped from $3,076m to $259m (forecast) and then only recover to $420m (forecast) in December 2017. That is still an 86% reduction in profits over six years. That forecast earnings recovery one year hence from $259m to $420m represents a 62% increase in forecast earnings one year hence.

What this suggests to me is that the recent 49% share price rise has been guided by a forecast 62% increase in profits one year hence.

BHP Billiton (BLT):


Share price is 831p and is 43% above the market low of 581p in January 2016.
So the (current) share price has dropped 68% in the five years from £25.32 in April 2011.

In the five years to June 2016, pre-tax profits will have dropped from $31,255m to $1,165m (forecast) and then only recover to $3,072m (forecast) in June 2017. That is still an 90% reduction in profits over six years. That forecast earnings recovery one year hence from $1,165m to $3,072m represents a 163% increase in forecast earnings one year hence.

What this suggests to me is that the recent 50% share price rise has been guided by a forecast 163% increase in profits one year hence.

The similarity in trend data between the two mining companies is striking. It is worth observing that these recent 50% share price increases have obviously not been made on the back of this year's forecast profits which remain dire, but on the one year hence forecast profits which are good if starting from a low base. This would be in contrast to other “normal” companies where this would simply not occur.

I recently read an article that miner share prices will likely pull back from their recent 50% share price increases in the coming months due to further weakening of commodity prices. In the context of that all important one year ahead forecast profits window, I would regard that as a minor effect should it come to pass.

It should be kept in mind that forecast profit data of the type used can be notoriously inaccurate. Here, however, it is not the magnitude of those forecast profits that we need concern ourselves with; rather we need to concern ourselves with the direction of those forecast profits – increasing or decreasing.

Our conclusion: The miners have truly bottomed.

Accordingly, this morning, I bought positions in both BHP Billiton (BLT) and Antofagasta (ANTO) at 821p and 502p respectively, to which I will add on subsequent significant share price weakness should the above thesis prove incorrect.

Regards,

P103
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