Mining stocks in choppy waters but intact long term

By Atul Prakash

LONDON (Reuters) - Mining stocks, the darlings of investors in the first half of 2008, run the risk of ranking among the worst performers by year end as a commodity boom runs out of steam and metals prices tumble.

But analysts say the long-term growth story for commodities remains intact, fed by still strong demand in countries such as China and India. In the shorter term, however, investors need to be more discerning in their choices, avoiding single-metal firms.

The DJ Stoxx Basic Resources index .SXPP surged 46 percent in the four months to mid-May 2008, but has slid 58 percent since then, driven by a 15-50 percent slump in commodities prices and the broader rout in the equities market.

Basic resources stocks are down 50 percent this year, an even worse performance than banking stocks .SX7P, which have been hard hit by the worst financial crisis since the Great Depression. The banking index has fallen 43 percent so far this year.

Shares in major companies such as BHP Billiton (BLT.L), Rio Tinto (RIO.L), Xstrata (XTA.L) and Eurasian Natural Resources (ENRC.L) have slumped between 50 and 70 percent since mid-May after rising 35 to 155 percent in the previous four months.

"The metals and mining sector continues to bear the brunt of a transition from momentum to value. We continue to favour the large caps which look most attractive on valuation and have greater earnings stability and cost control," Citigroup said in a recent report on the sector.

The broker cut 2009 earnings estimates for the metals and mining sector by 20 to 40 percent, with the largest downgrades coming at the more leveraged single commodity companies.

And there seems to be no silver lining in the months ahead.