Two high-yielding mining heavyweights to buy

Despite a good quarter for shareholder returns, jitters fuelled by fears of a US-China trade war mean that heavyweight mining stocks including BHP Billiton and Rio Tinto have little to show in terms of share price progress.

They are back where they were towards the end of the previous quarter, having given back gains of 20% or more seen at the tail end of 2017 and start of 2018.

However, analysts at UBS think there's still good reason to be positive about the sector, driven by expectations for continued balance sheet repair and improved shareholder returns.

They remain 'overweight' on heavyweight miners, with 'buy' recommendations on both Rio Tinto and BHP Billiton alongside a 'neutral' stance on Anglo American and Glencore.

Source: interactive investor                Past performance is not a guide to future performance

UBS said: "Whilst cost pressures are forecast to increase for raw materials and labour, we think a firm commodity pricing environment should help offset impacts, as should company cost and productivity initiatives."

The bank points out that its overweight call on the mining sector is based on its belief that there won't be a broad trade war.

It adds: "Recent volatility therefore provides opportunity to engage a sector which is benefiting from robust global growth, supply discipline and modest reflation at lower valuations."

UBS analysts are watching China closely at the moment after activity restrictions were placed on the country's industrial sector over the winter, partly in an effort to limit pollution.

As those cuts unwind, UBS said it will be looking to see if pent up demand draws down larger than usual stockpiles. China property and infrastructure signals will also need to be closely watched.

In the meantime, the bank's top commodity picks for the year are nickel, mineral sands, copper and iron ore. Nickel is being driven by electric vehicle battery demand, which UBS thinks could soon be a game changer as manufacturers scramble to buy nickel metal.

They added: "Copper looks more attractive, clearly being sold off on trade war fears and exposed to significant supply risk short term. Iron ore prices are now below marginal break-even costs and so don't look extended."

Source: interactive investor                Past performance is not a guide to future performance

Manganese and zinc are UBS's least preferred as prices appear to have rallied too high on a mix of unsustainable factors.

The recent round of returns to shareholders in the form of dividends and buybacks included a record full-year pay-out from Rio Tinto amounting to 290 US cents a share and a yield at the time of 5.3%.

With the additional promise of a fresh share buyback worth $1 billion before the end of 2018, the total figure returned to shareholders will amount to $7.2 billion, or 83% of 2017 underlying earnings.

The "superior cash returns" from Rio partly reflect the impact of initiatives started in 2016 by former boss Sam Walsh to cut $2 billion from costs over two years and to maintain tight control of capital expenditure.

Fund manager Neil Woodford recently warned that the rally in commodity prices is based too much on speculation and is not fully justified.

He said fundamental demand for commodities in China is being driven by credit growth, with the economy needing to borrow five units of debt for every one extra unit of growth created.

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