A crash in metals markets shows scant sign of bottoming, but investors betting stimulus packages will kick in next year could see stronger returns from leveraged groups like Rio Tinto and Xstrata than safer plays like BHP Billiton.
The next six months are likely to see further drops in metals prices while sentiment remains sour as the impact on profits emerges during the upcoming results season. But while analysts remain wary of the short-term, they see next year as an opportunity to lock-in mining exposure at bargain prices.
Many analysts expect metals prices to stabilize by the middle of next year with a fresh rally gaining steam by 2011/12. China, the main driver of the recent commodities boom, will eventually resume its heavy appetite for metals to build infrastructure as millions migrate to cities, they said.
Investors worried about the prospects for global recovery and commodities demand could gain exposure to metals through BHP Billiton, which has very low debt and a portfolio of low-cost operations that would continue to generate cash throughout the downturn.
Rio and Xstrata have each tumbled around 80% on worries they may struggle to make debt payments, but when metals and credit markets begin to recover, they should outperform, analysts said.
"It is during this period of trying to reset expectations that the 'sideways period' in miners could offer the opportunities of 150% upside in four months and 60% downside in four months as the mood swings," said Michael Rawlinson of Liberum Capital.