finweek

Mining stocks may see new highs

0:00
play article
Subscribers can listen to this article
Simon Brown, founder and director of investment education website Just One Lap. (Photo: JSE/Twitter)
Simon Brown, founder and director of investment education website Just One Lap. (Photo: JSE/Twitter)

The sector may be set for a decent rally on supply constraints over the next few years.


The global financial crisis of 2008/2009 is mostly remembered for the collapse of banks and their share prices. But often forgotten is that it also brought an end to the surge in commodity prices and mining company shares. The first decade of the century saw commodity prices across the board rallying with platinum peaking at around $2 000 per ounce and oil hitting $150 a barrel.

Locally, the FTSE/JSE Resources 10 (Resi 10) Index’s all-time high was in May 2008 at just under 78 000 index points while it is now hovering at around 64 000. In the 12 years since that high the mining companies have got themselves into great shape. They’ve paid down debt, been cautious on new projects, shut loss- making or marginal operations and avoided large deals.

Couple that to one of the responses to the pandemic, namely infrastructure build, and we may have a perfect storm for mining stocks that will take the Resi 10 to new highs and well beyond.

US President Joe Biden is likely to allocate large amounts of money to upgrade America’s ageing infrastructure. With China already spending on infrastructure, adding the world’s largest economy (the US) to that demand should see commodity prices shoot still higher.

Commodity prices are inherently cyclical. As demand grows, prices rise and that increase in prices sees more supply come onto the market which offsets demand and pushes prices down.

With soft commodities, such as maize or sugar, the cycles are short as adding new capacity is easy and so any price increase is quickly met with increased supply.

Increasing the supply of hard commodities such as platinum group metals (PGMs), copper, iron ore and the like are much slower as the lead times are much longer. Getting a new mine up to production can potentially take a decade and even just increasing the capacity of an existing mine is a project that will take many years to get up to speed.

So, the cycles are now much longer and as such the price increases we’ve seen in commodities will potentially continue for a couple more years before either demand starts to wane or new production starts coming online to push prices down.

The mining companies themselves are also in particularly good shape with some mining experts suggesting to me that mining stocks, with their robust balance sheets and low debt levels, are looking better than perhaps they ever have.

Put altogether we could well be positioned for a decent rally in this sector that will last for at least two or three years and maybe even longer. The low debt also means that we’ll see decent dividend payments, albeit that low debt may also see some miners decide to embark on major projects that could put their balance sheets at risk.

We may also see some major mergers and acquisitions as mine bosses decide the easiest way to increase supply is to buy a competitor. This always worries me, so I’ll watch this closely.

The easiest way to invest in the mining space is with the Satrix RESI ETF but one can also buy the actual miners themselves. However, I would stay away from gold miners. Gold is driven by fear more than anything and in a world that is rolling out vaccines, even if slowly and with some geographies lagging, gold’s run may start to stall. I’d rather look to focus on PGMs and industrial metals.

One side effect of higher commodity prices is that we can also expect a stronger currency as we saw in the initial years of this century. Commodities trade in US dollars and local miners then convert that into rand, creating demand for the currency and hence price strength.

Read more
This article originally appeared in the 4 February edition of finweek. You can buy and download the magazine here.

We live in a world where facts and fiction get blurred
In times of uncertainty you need journalism you can trust. For only R75 per month, you have access to a world of in-depth analyses, investigative journalism, top opinions and a range of features. Journalism strengthens democracy. Invest in the future today.
Subscribe to News24
ZAR/USD
15.51
(-1.41)
ZAR/GBP
21.45
(-1.19)
ZAR/EUR
18.38
(-0.72)
ZAR/AUD
11.86
(-0.58)
ZAR/JPY
0.14
(-0.93)
Gold
1682.16
(-1.45)
Silver
25.14
(-1.04)
Platinum
1141.00
(+0.44)
Brent Crude
70.77
(0.00)
Palladium
2309.01
(-0.79)
All Share
68426.17
(+0.23)
Top 40
62910.60
(+0.19)
Financial 15
12747.28
(-0.10)
Industrial 25
87156.37
(-0.52)
Resource 10
71780.93
(+1.38)
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Please select an option Oops! Something went wrong, please try again later.
Results
Yes, and I've gotten it.
21% - 1074 votes
No, I did not.
52% - 2696 votes
My landlord refused
28% - 1461 votes
Vote