Diversified Miners

BHP Billiton: Remains the preferred big cap name, balance sheet strong with debt reduction in 2014 on track, lowered costs and capex, net cash flow increasing, 4% dividend yield with moderate growth rates.

Rio Tinto: A well articulated and coherent strategy on lowering costs and capex, net cash flow increasing with cash return possible late 2014 into 2015, 4% dividend yield but some worries on iron ore price H2/14.

David Fuller's view

Here is the BMO report.

Mining shares are generally contra cyclical and often underperform until the latter stages of bull markets.  Often regarded as ‘dull old economy stocks’, especially when the cycle’s highly fashionable shares are outperforming, miners are often ignored for much of the bull market’s duration and consequently range sideways in large developing base formations.  However, when overvalued and overextended momentum plays finally lose form, as we have seen in recent months, re-ratings are usually underway.

The Nasdaq Biotech Index (weekly & daily) is a good example. It peaked in late February from its most overextended position, by far, relative to its 200-day moving average since the bull market commenced in 2009.  This Biotech Index has already seen a medium-term correction; is currently somewhat oversold and valuations are obviously less high than at the February peak.  Therefore it will attract some renewed interest as it is obviously now a better buy near its long-term trend mean, represented by the 200-day MA, than two months ago.      

However, following big accelerated peaks, sector indices or their leading constituent share performances are usually much more pedestrian than the action which attracted momentum players.  Also, these shares or indices usually see a downside overextension relative to their MAs which also roll over and decline for a medium-term period.  Apple provides this cycle’s template for that sort of action and its partial recovery occurred while the overall tech sector was still a strong performer.  Biotechnology will most likely remain a very attractive sector for the long term, even though the upside move for its Index will probably not be taken out over the next several months.    

Meanwhile, momentum players looking for additional upside moves will take interest in the miners when they eventually revert from underperformance to outperformance.  Base formation completion by BHP Billiton (weekly & (daily) and Rio Tinto (weekly & daily) will hasten that process.  An increasing number of smaller cap miners have been outperforming recently and you can find their charts in the Library. 

See also Eoin’s comments below on the same BMO report.