JPMAM’s Sutton: The mining opportunity being missed by markets

The outlook for mining stocks may have been improving for some time but JP Morgan Asset Management £1bn Natural Resources fund portfolio manager James Sutton argues that the market has yet to fully recognise the impact improvements in free cash flow will have on the sector.

Sutton acknowledges that after a period of being unloved the renewed focus on shareholder returns within large cap mining companies has been well received by investors, who have been returning to mining stocks in recent months.

“Of the four largest miners listed on the FTSE 100 – Rio Tinto, BHP Billiton, Glencore and Anglo American – three have replaced their chief executive within the last 16 months. They have a very clear mandate from investors to abandon their previous strategy of ‘growth for growth’s sake’ and instead run these businesses for stakeholders,” he adds.

The JPM Natural Resources fund currently holds a number of mining stocks including Rio Tinto, Glencore and BHP Billiton.

However while investors may be familiar with these changes in the mining sector, Sutton points out that the market is only just beginning to factor in the up tick in free cash flow that is set to take place within mining stocks.

“Although this better behaviour by the large cap miners has been on display for some time, the improved free cash flow estimates are only just being incorporated into models for 2015 and 2016,” he says.

“Estimates for how much cash these companies are capable of generating looking out to 2015 are becoming markedly better, and that gives analysts and investors more confidence.”

These improvements in free cash-flow have the potential to trigger a re-rating and bring “powerful flows” into the sector, according to Sutton.

“When you consider where we still stand in terms of depressed valuations on the sector and you compare that to the free cash flow yield and the multiples, it’s an exciting opportunity,” he adds.

“Fund manager surveys have been underweight to the large cap miners for something like two years and this sector has been all but abandoned by investors, so if we do get a material re-rating across the sector, we could see potentially powerful flows as money returns.”