Selling mining stocks when base metal prices are falling has a certain logic. London-listed mining groups have been in the vanguard of the recent equity sell-off and the 12 per cent drop by those in the FTSE 100 has contributed about one-third of the fall in the index since last Thursday. Is the decline overdone?

Certainly there are some interesting anomalies. Shares in Lonmin, the platinum miner, have fallen by almost 14 per cent, yet the precious metal itself has only dropped 2 per cent. In this instance the explanation lies in bid speculation layered on top of rising commodity prices, producing a 90 per cent run-up in Lonmin’s shares from the start of the year to last week’s high. With investors in a mood to take profits, taking the most speculative bets off first makes sense.

Share price falls at the large diversified miners, such as BHP Billiton, have been almost as sharp and there is more reason to suspect the move has gone far enough. Mining shares have done well this year, but lagged the sharp increase in base metals such as copper. There is already a justifiable degree of caution about the sustainability of prices. After the correction, consensus estimates of this year’s average copper price, for example, remain some 20 per cent below current three-month futures market levels

The pullback has left the diversified miners on a single-digit multiple of 2007 estimated earnings. Even ignoring the siren call of the super cycle and assuming those earnings are close to a cyclical peak, this is not an outrageous multiple. Further support is also offered by ongoing share buyback programmes, while the prospect of acquisitions has lent support to the likes of Xstrata. Further sector weakness is likely to attract buying interest.

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