After Fleeing in 2008, Investors Return to Red Hot Mining Shares

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"Analysts said the sector could prove to be a good pick over the next 12 months. . ."

Mining shares have turned red hot this year after a disastrous 2008 and are set to keep outpacing other sectors as the top beneficiaries of growing optimism that a global recession will be shorter than feared.

Signs of a recovery in China—one of the top consumers of raw materials in the world, emerging appetite for risky assets and resilient metal prices have prompted investors to jump on the mining bandwagon this year.

Investors are now willing to pay a premium for miners: the basic resources index trades at 16.2 times one-year forward earnings, according to Thomson Reuters data, 41% more than the broader market.

Analysts said metals prices are likely to remain underpinned by new infrastructure projects in countries like China, although any setback to the Chinese economy could hurt the sector badly.

The economy appears to be gaining momentum, with the China Purchasing Managers' Index rising to a nine-month high in April. Another survey pointed to a recovery in Chinese manufacturing.

"If demand picks up, particularly from resource-intensive countries like China, then we are going to find that prices of metals go up," said Peter Dixon, economist at Commerzbank. "And as long as they rise at a faster pace than the production cost, this is positive news for corporate margins."

Analysts said the sector could prove to be a good pick over the next 12 months and advised that it is the time to move away from 'expensive defensives' to 'cheap cyclical stocks.'

Improved price and demand outlook for metals would encourage companies having idle mining capacities to raise output.

Analysts remained in favor of large, diversified companies and said that aggressive measures taken by miners to tackle the financial crisis by cutting jobs, scaling down production and restructuring operations have raised investor confidence.

"I am optimistic. I think that the sector will be a good pick in the next 12 months. But I hesitate to recommend the small, illiquid companies with very large family holdings," said Iain Armstrong, analyst at Brewin Dolphin.

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