Mining for value in a shifting world
Parts of the mining sector still hold opportunity despite the changing dynamics of global energy consumption, slower Chinese growth and the rise of electric vehicles, writes Anthony Fensom.
Record export earnings and high coal and iron ore prices have buoyed Australia's resources sector, despite trade and interest rate headwinds.
Australia is expected to set a new record of $264 billion for resource and energy exports in fiscal 2019 – thanks to rising prices and volumes, along with a weaker currency, according to Australia's Department of Industry, Innovation and Science. This outlook is attributed to a combination of strong prices, and the department anticipates coal will overtake iron ore as the nation’s top export, followed by liquefied natural gas and gold.
Double-whammy for resources
However, the December 2018 quarter report warned of headwinds for the sector, principally from abroad.
“The world is nine years into the post-GFC recovery, and the peak of the current industrial production cycle has clearly passed, with potential issues around debt and spending emerging in a number of countries,” said the department's chief economist, Mark Cully.
Despite stimulus measures by China, the world's biggest commodity consumer, Cully warned of a potential “double whammy” for resources, comprising “the potential dual impact of growing trade tensions and a substantial slowdown in global economic activity”.
Morningstar’s Mathew Hodge, senior equity analyst covering resources, expects commodity prices and earnings to “generally decline” through 2019 and beyond.
“We are late into the global economic upcycle and see risks from rising interest rates and tariffs,” he said.
From its October 2018 peak, the ASX 200 resources index was down nearly 15 per cent in December, on the back of lower oil and base metals prices. While bulk commodities such as iron ore and coking coal used in steelmaking have proven more resilient, Hodge warns of increasing supply and potentially lower demand.
“We expect China to reduce its iron ore and coking coal consumption, due to falling steel consumption and a rising share of demand being met with recycled scrap.
“There's no shortage of capacity – it’s really been China’s activity on the supply side, and the fact that demand has been robust due to their continued borrowing, that you see prices where they are at. But the longer prices stay up, the more likely we’re going to see a supply response”.
Iluka, Newcrest among opportunities
However, despite seeing the bulk commodity producers as "generally overvalued", Hodge still sees areas of value for investors, including mineral sands miner Iluka Resources (ASX:ILU) and gold miner Newcrest Mining (ASX:NCM).
“Iluka is exposed to late cycle commodities in zircon and titanium dioxide feedstocks. We think future industry supply is challenged, particularly for zircon, which should support prices,” he said.
“Newcrest should benefit from growing gold demand in India and China. It has good long-term assets that are expandable and can generate a good incremental return, with a longer reserve life than their peers and a capable management team”.
Along with gold and mineral sands, Hodge also suggested uranium prices could move higher due to falling supply.
'Clean-energy revolution'
Morningstar analyst Seth Goldstein also points to the clean energy revolution in electric vehicles and battery technology, which is powering demand for metals such as aluminium, copper, cobalt, graphite, lithium and nickel.
Rising demand for clean energy and EVs boosts consumption of copper and other metals
Goldstein sees EVs making up 15 per cent of global auto sales by 2028, which together with hybrids could account for more than a third of total sales. For lithium, he expects EV adoption to boost global demand to around 775,000 tonnes by 2025, up from 175,000 tonnes in 2015.
Other forecasts, such as by Benchmark Minerals Intelligence, point to a quadrupling of lithium battery-making capacity by 2022. More than 60 battery “mega factories” are either already built or in the pipeline, up from just three in 2015.
"The lithium boom has barely begun, powered by demand from electric vehicles, battery storage, consumer electronics and other applications. With the supply response slower than anticipated and demand continuing to rise, lithium miners are well-placed to benefit from the clean-energy revolution," said Steve Promnitz, managing director of Argentina-focused Lake Resources (ASX:LKE).
Together with battery minerals, Jeremy Bond, chief investment officer of Terra Capital, points to gold and potentially uranium.
“Gold is the most obvious place to invest, given the uncertainties globally, particularly for Australian gold producers given the weaker Aussie dollar,” the fund manager said.
“In 2019, you could see some price action in uranium too, with the incentive price still a lot higher than the spot price. It looks like a commodity where rising prices might bring out animal spirits in equity investors.”
Looking ahead, Bond sees potential resource gains should geopolitical tensions ease.
“If there’s a resolution of the [U.S.-China] trade dispute and a softening of the U.S. dollar, then the market could surge … this would be very bullish for the base metals.”
