Three years into the mining bust, however, the big diversified miners - groups like BHP Billiton (BLT), Rio Tinto (RIO) and Glencore Xstrata (GLEN) - are increasingly hard for stock-pickers to ignore. Their shares trade at an earnings-multiple discount of about 13 per cent to the wider market, according to Citigroup. Dividend yields point to a similar level of under-valuation. Most importantly, profits seem to be bottoming out after the massive downgrades of 2012 and 2013. Now could well be a sensible time to buy back into a sector that has fallen out of favour.
So what could go wrong? The most obvious risk lies with commodity prices. If iron-ore prices plummeted, say, cash profits would slip at BHP and Rio Tinto, jeopardising the dividends currently underpinning share prices. This is what happened in the crash of 2008-09. Many remain bearish now because of China's slowing growth profile: the country is the world's most prolific steel-maker and accounts for around two-thirds of global demand for sea-borne iron ore. Worries about a Chinese property crash, combined with news of expanding output in Australia, have depressed prices of the resource by about 20 per cent so far this year.
These concerns are certainly valid, but they are also well-documented. You probably wouldn't be able to buy BHP on a 3.7 per cent dividend yield without them. And, crucially, the miners remain profitable at current price levels. The losses of the past couple of years have stemmed from asset write-downs, not cash flow problems. It's worth recalling that BHP maintained its payout even through 2009, when prices collapsed (though it was the only big miner to do so). Now the outlook is surely more benign. As growth in China slows, it should accelerate in Europe and North America. Even in China, the government-steered nature of demand makes a sudden collapse unlikely. On the supply side, cut-backs in capital expenditure suggest the increases in supply this year will ebb away again.
This brings us to the second risk: that management teams fritter away profits on low-return capital projects or acquisitions. This has been the more recent worry among investors and a major reason for the latest correction in mining stocks. "Either you believe management teams are going to do a better job of looking after your money now than they did over the past cycle - or you don't. That usually depends how badly you were burnt the previous time round," says Evy Hambro, who heads the natural resource equities unit at BlackRock.
Management teams - which have been replaced at all the big miners bar Glencore since 2011 - are now making the right noises. They have cut their spending commitments and focused on freeing up cash flow. BHP, for example, took advantage of "market speculation" earlier this month to reassert its commitment to a leaner portfolio of commodities. In the oil and gas sector, Shell (RDSA) also has a new chief executive, Ben van Beurden, who used the group's annual results in January to make similar pledges. This has reframed the companies as turnaround stories rather than mere punts on commodity prices.
The FTSE 350 mining stocks have fallen 39 per cent since the start of 2011, even as the wider index has gained 16 per cent. But this massive underperformance has stopped over the past six months, bolstered by robust results in February and March. Asset managers remain heavily underweight commodities, but are starting to buy them back, according to last month's global survey by Bank of America Merrill Lynch.
Of course, clear signs of a sector recovery may not emerge for some years. Tom Nelson, portfolio manager on the commodities team at Investec (INVP) Asset Management, speculates that the current mantra of capital discipline in both mining and oil and gas could cause companies' cash flow to leap in 2015-16, just as spare capacity in global commodity markets is eroded. In any case, with mining shares yielding 3.5-4 per cent and big oil stocks nearer 5 per cent, investors are amply paid to wait.
