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FUND MANAGER VIEW: Why it is time to revisit unloved mining stocks

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Chris Murphy, fund manager at Aviva Investors, explains why mining companies are starting to look attractive again.

Many mining companies have become synonymous with poor capital discipline, value destructive acquisitions and questionable governance in recent years. At first glance, this would suggest long term and conservative investors should steer clear.

But things are changing. We believe mining stocks are starting to look attractive again. In fact, there was a time when I held no mining stocks at all, but I now have an overweight position in two of the major companies in the sector.

Why is this? Well if you strip away the market noise around these companies, what you’re left with is two good fundamental businesses that own quality assets that can generate long-term cash flow, while delivering dividend yields that are comparable to the rest of the market, and in fact are growing.

In terms of governance issues, it appears that the industry is undergoing a slow but sure transformation. 2013 saw three of the biggest names in the industry, Rio Tinto, BHP Billiton and Anglo American, replace their CEOs – a strong message that the behaviours of the past will no longer be tolerated.

The sector also seems to have turned a corner with the type of people at the helm. One example is the appointment of Sam Walsh as CEO of Rio Tinto – a no-frills straight talking Aussie with 20 years in the company and a background in auto manufacturing. During meetings he speaks at length not just about the next big asset they are eyeballing, but about the importance of reducing operating costs and improving efficiency and productivity. One of his first initiatives was to introduce an aggressive cost cutting project – leading from the top by halving his own travel budget.

When looking at stocks to invest in for the long term, the valuation of those companies is key, rather than trying to second guess the market.

Speculation over China and commodity prices will naturally rock share prices over the short term, but the longer term picture is that China – although slowing – is still massive and will continue to demand commodities. China lacks technology and over the long-term owners of these tier one assets will continue to be ahead of the game when it comes to getting stuff out of the ground.

These kinds of mining giants can be thought of as self-help companies, ones that are unloved and out-of-favour but are making the right moves towards a new culture which will bear fruit. One mustn’t be under any illusions however, that these big ships will take years rather than months to turn round.

Just like those on the industry’s frontline, mining shares have been out of sight and out of mind for some time. Now all the signs are that they are surfacing once more, and it is a sector that deserves consideration.

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