By Barbara Lewis and Simon Jessop
LONDON (Reuters) - The world's biggest diversified miners have yet to see their share prices reflect their role as providers of the minerals needed for a shift to a low-carbon economy.
Mining companies provide minerals such as cobalt used in electric vehicle batteries and copper for increased electrification, and the sector's balance sheets are in rude health.
Still, many investors are wary. Concerns include the demand outlook from China, the world's biggest consumer of metals; the sector's history of wasting shareholders' money on mergers and acquisitions that never deliver returns; and a patchy record on environmental, social and governance-related (ESG) issues.
Reminders of the dangers include a disaster in Brazil at a Vale tailings dam in January that killed an estimated 300 people, and a U.S. corruption investigation into Glencore (LON:GLEN), announced in April.
Refinitiv data shows the Big Four diversified miners - Rio Tinto (LON:RIO), BHP, Anglo American (LON:AAL) and Glencore - trading at a lower forward 12-months price-to-earnings multiple than Britain's FTSE 100.
"All the large mining companies are trading on high free cash flow yields relative to the broader market when you adjust for capital spending on growth projects," said Nick Stansbury, head of commodity research at Legal & General Investment Management (LGIM).
"This is indicative of the market's scepticism about the sustainability of those cash flows, the robustness of capital allocation by management and the sector’s challenges around ESG issues."
James Clunie, fund manager at Jupiter Fund Management, which holds shares in Rio Tinto and BHP, agreed uncertainty around medium-term commodity prices was a deterrent.
"A whole class of people say 'I'm out' because of that uncertainty, and that leads to (the stocks') undervaluation," he said.
(Graphic: Valuations of the world's top diversified miners png, https://tmsnrt.rs/2GSdAlN)
For an interactive version of the graphic, click here https://tmsnrt.rs/2GSDbei.
The same attitude is reflected in the ratings given to the four companies by brokers, with most favouring a fence-sitting "hold" recommendation.
(Graphic: UK mining's 'Big 4' - what do the analysts say? png, https://tmsnrt.rs/2DIaWgl)
For an interactive version of the graphic, click here https://tmsnrt.rs/2DIaVsN.
On the flipside, others focus on how the miners have transformed their balance sheets and improved governance.
"Compared to the past, the resources sector is carrying a fraction of the leverage it used to, which should reduce the volatility of the shares," Evy Hambro, manager of the world's largest actively managed mining equity fund, BlackRock's BGF World Mining Fund, told Reuters.
"In addition, the improved capital discipline combined with lower levels of reinvestment has increased the free cash flow available to shareholders and resulted in rising distributions to shareholders."
BlackRock (NYSE:BLK) is the world's largest money manager, with some $6 trillion in assets. Hambro manages a combined $11.9 billion across several funds.
(Graphic: Rio Tinto - key financial metrics png, https://tmsnrt.rs/2VDAwgO)
For an interactive version of the graphic, click here https://tmsnrt.rs/2VEal9z.
(Graphic: BHP Group - key financial metrics png, https://tmsnrt.rs/2DUpEBh)
For an interactive version of the graphic, click here https://tmsnrt.rs/2DHI9sc.
(Graphic: Anglo American - key financial metrics png, https://tmsnrt.rs/2VG8AsA)
For an interactive version of the graphic, click here https://tmsnrt.rs/2VG8y3W.
(Graphic: Glencore - key financial metrics png, https://tmsnrt.rs/2VJ0She)
For an interactive version of the graphic, click here https://tmsnrt.rs/2VIClZK.
LGIM's Stansbury said the sector was wrestling with several paradoxes.
"They are one of the most crucial industries in the fight against climate change," he said, referring to the minerals they can produce to roll out electrification and renewable energy.
But extracting those minerals results in high levels of emissions, volumes of water consumption and fatalities, despite promises from major miners to eliminate harm.
Mining can also lift large numbers of people out of poverty by providing well-paid jobs and helping to roll out electrification in emerging economies, but operating in the fragile democracies where some of the richest resources are found can expose miners to corruption allegations.
"It is essential the sector makes further progress on transparency and corruption. Investors need to be confident that the government take from resource extraction is used for the benefit of the local population," Stansbury said.
Another concern is that the sector's financial health could be setting it up for a fall.
"Counterintuitively the risks around misallocation of capital are greater now that the sector has largely resolved their balance sheet problems," Stansbury said.
"At the bottom of the last cycle the sector just didn't have the money to spend unwisely on bad projects. Now they do, so it's no surprise that these concerns are rising again in investor's minds."