TRADE of the MONTH

AThe PGM basket price will need to rise by an amount commensurate with both unit cost inflation and lost production due to load-shedding just for economics to be maintained

nyone who bought shares in tin miner Alphamin Resources this year will be smiling. The stock is about 30% higher.

Had you held the share since January 2022, however, you’d be far less gratified. Alphamin was down 44% last year. In 2021 it was 400% higher.

Clearly, to own shares in the company is to invest in resources without guardrails. One important reason for this is that the tin market is wafer thin. Any slight supply disruption, such as protests in Peru, which is a major tin supplier, sends the price of the metal rocketing. Demand disturbances have a similar effect. China’s Covid lockdown regime last year heavily reduced demand for tin as solder, sending the price of the metal from a high of $50,000/t to $17,000/t — just above the break-even required by Alphamin’s Congo mine, Bisie.

To be fair to its investment case, Alphamin became a dividend payer last year and is this year expanding Bisie to more than 20,000t of tin in concentrate annually from 12,000t today. But the point is that Alphamin shares will always reflect a tight market heavily dependent on Chinese demand. Added to this, Bisie is in the northern part of Congo, which was once the stamping ground of the warlords who raged there. Jurisdictional risk is therefore high.

Given that some metals and jurisdictions will always be subject to outsize volatility and that Alphamin is a “pure play”, the smart money must always be on the mining diversifieds, where risk is spread. What’s more, in the current market rewards needn’t be pedestrian. And of the diversifieds on offer, Glencore is tipped by analysts to have the best chances of outperformance this year and into the next.

Christopher LaFemina, an analyst for Jefferies, said in a recent report that Glencore has “the cushion” of thermal coal production and high exposure to copper, a metal that’s forecast to soar in price in the coming years as a supply deficit widens.

Speaking in December, Glencore CEO Gary Nagle estimated new copper demand of about 100Mt from now until 2030. Of this, 76Mt would be for power grid expansions and 19Mt for electric vehicles. This would lead to a hugely undersupplied copper market, equal to a cumulative annual deficit of

50Mt, he said. “The world doesn’t get it. It doesn’t understand that there’s a huge deficit coming,” Nagle said in an investor update.

Glencore was due to post its full-year results for 2022 at the time of writing. It’s likely that coal played an enormous role in its earnings — at an average realised spot price of $245/t according to a group production update last month. It gives Glencore a higher margin than the price in a December estimate, in which coal income represented more than half of total group earnings before interest, tax, depreciation and amortisation of $28.7bn for 2022. In other words, Glencore is earning a mint on a commodity that Anglo, Rio Tinto and, to a lesser extent BHP, have exited.

“Glencore is well positioned for now and for later, in our view,” said LaFemina. “The company has the ability to sustain its free cash flow yield even as energy markets normalise,” says Goldman Sachs. It thinks that over time, coal cash flows will be replaced with cash from rising copper prices. “We remain buyers,” say analysts at Deutsche Bank.

Glencore has one other benefit: while its divestment of noncore assets is generally complete — it has sold $3.4bn in noncore assets since 2021 — there’s the potential sale of agribusiness Viterra. The business generated first-half ebitda of $1.1bn and has a net present value of $8.2bn.

So far, so safe. A metal that’s generally less acknowledged amid investment preference for miners that decarbonise or digitalise is gold. Last year represented a record price in nominal or unadjusted terms for gold. Crypto, an asset class reputedly created to compete with gold, proved volatile, whereas gold does what it’s always done: retain value.

Gold demand has registered a record high and central bank purchases have been at a 55year high, according to Rory Townsend, an analyst for Canadian bank BMO Capital Markets. He says the gold price will moderate this year — yet factors that include heightened geopolitical uncertainty and concerns over inflation are expected to support gold well.

Others are more optimistic. The macroeconomic backdrop is becoming “increasingly bullish for gold”, said Bank of America in a January 23 report. Gold’s diversifier role in a portfolio was coming to the fore even though it wasn’t among the metals favoured in the globe’s push towards decarbonisation. Investors can benefit from

“gold’s near-term price appreciation and its long-term strategic portfolio diversification”, the bank’s analysts said. They forecast the metal “pushing above $2,000/oz in the coming months on tailwinds from US rates”.

Set against this forecast for a strong to moderately performing metal, a gold stock with fundamental margin improvement at its business case is probably preferable to a company where gold price leverage is the driver, such as Harmony Gold, which is riskily exposed to local cost inflation — such as electricity — labour dissatisfaction, community disaffection and, of course, the rand.

AngloGold Ashanti is the best-option candidate in this regard. CEO Alberto Calderon, a former BHP executive, was appointed in September last year and has set about cash cost reductions across the portfolio which are expected to grip this year. Third-quarter gold production increased by a fifth and all-in sustaining costs were reduced 6% year on year. For

his part, Calderon has been keen to tamp down overly zealous expectations. “I don’t know what’s going to happen with inflation, he said last year. He ’ s inflation”might be tempering. factoring in sustained input cost pressure despite signs that global

The stock is preferred by Nedbank Securities analyst Arnold van Graan in preference to Gold Fields, which failed in a high–stakes takeover of Yamana Gold. Gold industry consolidation such as Gold Fields’ bid is set to remain a feature this year, though whether this will extend to AngloGold is highly speculative. Calderon has little interest in mergers and acquisitions, but Neal Froneman, CEO of Sibanye-Stillwater, told IM that his interest in the threeway tie-up between his company, Gold Fields and AngloGold is as relevant as ever. “I still believe in the creation of a South African mining champion,” he said. Direct communication with the other companies has been ruled out for now, however.

Broadly speaking, commodity markets are expected to be “a little calmer”, according to Anglo American CEO Duncan Wanblad. Asked for his view on which metals might perform well, he predictably chose those that supply electric mobility — platinum group metals (PGMs) — and metals supporting decarbonisation. Supply deficits would begin to emerge as the year progressed, he said.

“Copper, nickel and PGMs are still likely to be fairly robust in the short run. The shortness in the market will be evident in the next few weeks,” he said. “There are still deep growth aspirations and you will feel the tightness, as not a lot of metals are coming on stream.”

Analysts, though, don’t prefer Anglo, despite the company being the best performing diversified miner in 2021. There were conflicting messages about PGM markets, and Anglo American Platinum (Amplats), in which Anglo has an 80% stake, was expected to be badly hit by inflation, load-shedding and specific operational problems of its own.

“The PGM basket price will need to rise by an amount commensurate with both unit cost inflation and lost production due to load-shedding just for economics to be maintained,” say analysts at RMB Morgan Stanley. The bank expects unit cost inflation, which averaged 15% last year, to be maintained in 2023 while the impact of Eskom power curtailments are “likely to pose material ongoing risk to the miners’ ability to process mined production”. Froneman thinks a 20% reduction in South African supply is possible this year compared with an estimated 10% primary output hit in 2022.

In general, though, analysts side with Wanblad in his appraisal of the commodity markets. “Our conclusion is that with China set to deliver a positive economic impulse into 2023, it should underpin powerful relative outperformance from the miners even during a Western world recession,” said Barclays analysts in January.

One final caveat is that investment opportunities in mining diversifieds in particular are predicated over more than just a year. There is positive momentum in terms of China’s reopening and, on a microeconomic level, mining company capital discipline, says Credit Suisse. It says diversified miners will be able to generate free cash flow equal to between 35% and 75% in market capitalisation over the next five years.

Last year represented a record price in nominal or unadjusted terms for gold