"The question now is whether mining share prices fully reflect the risk of a cyclical downturn in commodity markets as the risk of a downturn has clearly increased, with the ongoing trade wars as a potential catalyst," analysts at Jefferies said this week.
Bernstein's team compared the current demand-side situation to that of early 2015: "Chinese economic growth is cooling, prompting fears of a global economic slowdown, which would precipitate itself in the reduction of demand for raw materials. A year later, in early 2016, we saw the commodity price deck hit its very lowest point, driving industry margins to two standard deviations below their long-run average.
"Could this happen again? Are we staring in the face of another equity price rout, just like in 2015?"
Both groups believe the answer is no. Jefferies says the deep trough for mining share prices in 2016 was due to a combination of commodity price weakness and bad company balance sheets, and it says the latter "are much stronger now in most cases" and it doesn't expect commodity prices to fall to 2015-16 levels.
"Risk/reward in mining is therefore skewed to the upside," it says.
Bernstein says as well as de-gearing by many companies that meant lower commodity prices "would not put significant strain on the companies as it did before", it sees undersupply rather than oversupply in key commodity markets. "The supply pipeline looks entirely different today than it did in 2015," it says.
"Ultimately, the financial stress experienced by producers in 2016 and the very low commodity price environment made investment in new supply unattractive. The capex-to-D&A ratio dipped below 1.0x in 2016 and hasn't moved far above afterwards, which has put a significant cap on the potential new capacity that could come online in the next few years. If demand is indeed to decelerate, be it due to a worsening of trade tensions or another domestic slowdown in China, it will now be met with a deceleration of supply growth [rather than the acceleration seen previously].
"At the same time, any further downside would create even less incentive to invest in new supply, which is a further positive for price."
Jefferies agrees a slow recovery in demand combined with the significant supply constraints "in every major commodity" should lead to higher commodity prices, and higher commodity prices should lead to higher mining share prices.
Based on its analysis, this is a question of "when rather than if".
Jefferies says its assessment of sector EV/EBITDA multiples shows larger mining equities are discounting a commodity price environment similar to that of the second half of 2015/first half of 2016. Inserting average commodity prices from that dark period into its 2020 EBITDA estimates for the major miners reveals iron ore-dominated BHP, Rio Tinto and Vale are "relatively expensive" at current trading levels. "However, unless China has a hard landing, the iron ore price is most unlikely to revisit 2H15-1H16 levels due to the ongoing supply issues. Therefore these premium multiples are justified, in our view."
The bank, on the other hand, sees Anglo American and Glencore as "notably inexpensive", while Australian iron ore producer Fortescue Metals Group "is inexpensive as well".
"In the case of the pure-play copper miners, multiples on a 2H15-1H16 scenario are in line with what we would expect at a weak point in the cycle, but lower than what we would expect at a trough. We believe these equities are attractively valued - especially Antofagasta and Freeport - and we conclude that long-term value investors should buy these shares now."
Jefferies says in the absence of copper price momentum, producers in the space would likely tread water without a positive catalyst. "A US-China trade deal would be a significant positive catalyst for the copper price and the copper mining equities, in our view."
Bernstein's latest review of "what looks cheap" comes to some different conclusions. It is seeing value virtually across the board among mining leaders based on current share prices versus historical multiples and its view of "consistent mean reversion" in commodity returns and the earnings margins and capital returns of companies over time.
"All of our coverage companies are lagging behind their long-term multiples, thus mean reversion suggests upside going forward," it said.
"The iron ore producers do, however, stand out as particularly cheap today."