Diversified resources have magnificent run
UP 200% TO 300%: HOW MUCH LONGER CAN IT GO ON, EXPERTS ASK
Political instability and a weakening rand could change prospects very fast.
miners.
On a one-year view, the Resi has continued its secular upswing, gaining 13% so far this year, versus the All-Share Index (-11%), Industrial Index (-22%) and the Financial Index (-5%).
Over three years, the Resi has outperformed the Industrial Index by 90%.
Citadel’s Victor von Reiche says large diversified miners, representing over 50% of the Resi, are heavily geared towards iron ore, copper, metallurgical and thermal coal prices.
Copper prices have fallen about 15% since mid-2018, as the US/China trade war warms up, but iron ore and coal have held their ground.
But Cadiz Corporate Solutions’ Peter Major doubts the mini-boom has much left to run.
“A general rule of thumb in mining is when everyone is making money, commodity prices are too high.”
The percentage gained by the Resi, which has continued its secular upswing
Apart from a small drop in copper prices, just about everyone is making money in mining, so that tells me commodity prices will come under pressure.
The mining board laggards are concentrated on a single commodity, like gold, and over-represented in SA.
They’re beset by obstacles, from union disruptions to stuttering electricity supply.
A weakening rand could positively change the outlook.
Most forecasts place it at R13.50 to R14.50 for 2019, but a political or economic shock could upend this.
Mining Indaba’s Alex Grose says there’s growing interest in SA mining, as the mining charter and other issues are being ironed out.
What to avoid
Von Reiche avoids companies that: Have high unit costs Are highly leveraged with high capital expenditure Have limited brown field expansion opportunities Have short life-of-mine operations Are single commodity, and Are exposed to com modities that look expensive based on a long-term real-price basis.
Opportunities
Diversified mining companies offer the best opportunities, says Von Reiche. “Anglo American looks attractive from a valuation perspective, while BHP Billiton continues to reward shareholders with cash returns via dividends and buy backs. African Rainbow Mineralslooks attractive.”.