Opportunities in the mining sector
Morningstar analyst Jon Mills walks through the mining sector and his top opportunity for investors.
Mentioned: Agnico Eagle Mines Ltd (AEM), BHP Group Ltd (BHP), Fortescue Ltd (FMG), Newmont Corp (NEM), Rio Tinto Ltd (RIO), South32 Ltd (S32)
James Gruber: Jon, which stocks stood out in terms of their results this earnings season?
Jon Mills: Well, James, probably one of the most prominent was Fortescue, so an iron ore miner, obviously. Iron ore prices are still very high and it's minting cash and shareholders are benefiting. Another one I'd point out would be Agnico Eagle, so the world's third largest gold miner. Of our coverage list, it's actually one of the senior gold miners that's performing well. So, sales and costs were about where we expected.
Gruber: And what about stocks that didn't do as well?
Mills: Well, speaking of gold miners, Newmont, the world's largest gold miner, it's just taken over Newcrest and it's obviously digesting that. But its production is still lower than we expected and that means higher costs and low margins. Another one I'd point out is South32. It's obviously a diversified miner. Its met coal business, which is benefiting or should be benefiting from high prices, actually at about half in terms of production and most of its other commodity exposures, the prices are down. And so, it was a pretty poor result.
Gruber: And in terms of your outlook for the commodities going forwards?
Mills: Yeah, well, look, I mean, we still think iron ore prices, I mean, they're around US$120 a ton at the moment. We still think they're elevated. I mean, demand from China remains strong because of Chinese steel production. But we think sooner or later they will come back. Along with that metallurgical coal prices are very strong. And so, we'd see them coming back probably for similar reasons. Look, thermal coal prices have come back a lot since the highs of the past couple of years. We still think they'll remain strong. And then gold, I mean, we have a few picks in the gold sector, which we think are undervalued. In the near term, gold has been affected by worries over real interest rates. But we think of the longer term there could be opportunities there.
Gruber: And what are your favorite stocks?
Mills: Well, one of our favorite stocks is Newmont. It's not performing well now, but it's decided to sell a number of its smaller mines that is part of the transaction with the Newcrest. It's becoming more efficient, I would say, so concentrating on the larger, lower-cost mines. Again, its margins are currently too low. But we think over the coming years things should improve. And with any luck, the share price should actually go up.
Gruber: Final question, BHP and Rio, what's the outlook for those?
Mills: Well, I mean, yes, they're both basically iron ore miners with a bit of copper and aluminum thrown in if you're looking at Rio Tinto. I mean, they're benefiting from high iron ore prices at this stage. But we think they're modestly overvalued at the moment.