Can 2016 winners Centamin plc (+145%), Anglo American plc (+149%) and Lonmin plc (+183%) keep on climbing?
Shares in Centamin (LSE: CEY), Anglo American (LSE: AAL) and Lonmin (LSE: LMI) have all risen by at least 140% so far in 2016. The temptation to lock in some profits is likely to be strong. After all, this kind of performance isn't exactly normal for big firms.
Despite this, it's worth remembering that Anglo shares are still worth nearly 10% less than they were this time in 2015. They're still down by 75% compared to five years ago.
Lonmin's market cap is also much lower than it was a few years ago. The only exception in this trio is Centamin. Its shares are worth 25% more than five years ago, even though its profits are lower than they were at the peak of the gold boom in 2011.
Miners may continue to rise
Up and down cycles in the mining sector usually last for a number of years. After peaking in 2011, shares in Anglo American fell continuously until January 2016.
January's brutal sell-off left many mining stocks priced for a failure that hasn't happened. The market seems to be recovering. Commodity prices have stabilised and in some cases improved. If history is any guide, the next up cycle could last several years. It seems reasonable to expect that miners could report rising profits for a number of years yet.
It's usually wise to stay invested in a bull market, as long you focus on good quality businesses. Is that true here?
Centamin's gold production rose by 12% to 140,306 ounces during the second quarter. This should be good news, given that the price of gold rose by 6% over the same period.
Yet the firm's shares fell following Thursday's Q2 update. One reason for this might be that profits are expected to fall in 2017, when a profit-share agreement with the Egyptian authorities takes effect.
As a result, Centamin shares on a 2017 forecast P/E of 20, with a prospective yield of just 1.4%. Unless you believe the price of gold is going to rise much higher, then I'm not sure Centamin is cheap enough to buy at the moment. I'd hold.
Lonmin and Anglo American haven't yet published their second-quarter updates, but I expect further signs of progress. The price of platinum has risen over the last six months, which should help both firms.
The South African rand has also remained relatively weak against the US dollar, which provides a further tailwind for the South Africa-focused groups.
The currency question
Commodity stocks have surged since the EU referendum. Their businesses won't be affected by our decision to leave the EU, but the weaker pound means that their US dollar profits will be worth more in sterling.
At the start of June, the pound was worth about $1.45. Today, it's worth about $1.30. This alone has increased the value of US dollar earnings in sterling by about 10% and has helped lift London-listed mining stocks. This currency boost may reverse at some point and I wouldn't be surprised to see mining stocks pull back somewhat after recent gains.
Despite this, I believe that both Anglo American and Lonmin could have further to go. But I also feel that the easy profits are now in the price. Further gains may take longer and require more patience.
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I could be wrong about mining stocks' potential for further gains. It certainly makes sense to diversify when the future is so uncertain.
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Roland Head owns shares of Anglo American and Lonmin. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.