Joseph Taylor: Hi, Jon. Thanks for joining me today. We're here to talk about your Mining Industry Pulse that you just released. What do you think is the outlook for the sector in general, at the moment?

Jon Mills: Well, Joseph, when you're talking about commodities and miners, it's all about China, because China is the biggest sources of most commodities. The Chinese economy is going okay. It's not great, but it's not terrible. What's really impacting commodity demand, at the moment, is their depressed residential property sector and infrastructure spending that isn't really as high as it has been in the past when the Chinese economy has not been as growing as fast as the Communist Party wants. What is helping, though, is that manufacturing is really cranked up, and that's helping demand for steel, hence iron ore, and also, copper.

Taylor: So, there are some bright spots, but as you said, there have been quite a few concerns about the property sector. And there's also been quite a few questions about when is the Chinese government going to step in with real stimulus? Could that help the outlook in general?

Mills: Well, yeah, it could help. So, far at least, they've just been tinkering around the edges in the property space. I mean, there has been more support, but compared to the size of the problem, it's really not that big of a support.

As I said, infrastructure spending is not that great. And so, yeah, look, I mean, at the moment, they're not really committed to cranking up support for the economy in general. But look, there's this big third plenum meeting coming up. So, we'll wait and see.

Taylor: So, that situation is kind of reflected by the fact that across the sector, as a whole, valuations look rather fair, but there is dispersion and there are pockets of value elsewhere. So, one of those areas that you highlighted in your report are the major gold miners. So, most gold miners kind of caught up with the strong gold price in recent months. But two of the biggest names, Barrick and Newmont, they're still kind of lagging and remain undervalued. So, why is that the case?

Mills: Yes. So, look, as you mentioned, the gold price has been going up because people think that interest rates have peaked and the Federal Reserve – or led by the Federal Reserve in America, they're probably going to start reducing interest rates. Look, I mean, there have been a few central banks that have already cut interest rates. So, that's bullish for gold prices.

Also, look, we've had a few geopolitical events recently. I mean, an assassination attempt in the U.S. and there's various uncertainty around the world. And that's usually bullish for gold as it – it's a store – well, it's a safety. People invested in it for safety reasons. So, yeah, look, I mean, the gold price is being going up and gold miners' share prices have been going up. Newmont and Barrick are less so because they have problems at various mines. And that's been a feature for a while now.

Look, they've really got to increase production at various mines, including some of their bigger mines. And if that happens, then you should see their unit costs go down and margins increase, and hopefully, that gets reflected in the share prices. So, that's why we think those two are undervalued.

Taylor: Great. And you also mentioned that you see value in certain coal and mineral sands miners. One of the mineral sands miners is Iluka. And so why do you like that share at these prices?

Mills: So, yes, so Iluka, Iluka is being affected by the slowdown in Chinese property, but also Western property markets. Look, I mean, things are still not great in both China and in the West. But it's – we like mineral sands long-term because there's a positive supply/demand picture. There's really no – on the supply side, there's really not many high-grade, low-cost, long-life mines that can come online. So, we think supply will be restrained and in the longer-term, that's bullish for prices.

Taylor: I mean, Iluka's 20% shareholding in Deterra Royalties wouldn't have helped recently. The shares have been weak. Do you think they should hold on to that share?

Mills: Look, I mean, it's a nice investment. I mean, yeah, I think I don't see any reason for them to sell it at this stage. I mean, it is a potential source of proceeds should they need them. I mean, Iluka is trying to build its rarest refinery over in Western Australia and CapEx, that is blown out. So, they're currently negotiating the Aussie government to get even more funding or at least an increase in nonrecourse loan to build that refinery. So, look, I mean, if things get worse in the mineral sand space in particular, they can buy with increased CapEx for that refinery. Look, maybe it's a source of funds, but at this stage, I think they should keep it.

Taylor: Great. And weakness in Deterra share price was due to the mergers and acquisitions announcement. But that wasn't the biggest M&A news recently in the mining sector. So, has the BHP and Anglo American saga kind of been put to bed now?

Mills: For the moment, yeah. So, under U.K. tax law – U.K. M&A law, BHP can't come back for six months. So, basically, sometime in November is the earliest they can come back if they so choose.

Now, look, I mean, Anglo are proceeding with restructuring their business to essentially do what BHP wanted more or less, basically, selling everything except their copper business, which is the main attraction and keeping their iron ore business. So, they're proceeding with that, but we'll wait and see to see if BHP or someone else perhaps comes in.

Taylor: And while we're on the topic of the kind of the mining majors, what evaluations are looking like there?

Mills: Yes. Look, I mean, speaking of BHP and Rio, they're around fair value. We still think Fortescue is overvalued. It's benefiting from high iron ore prices and low discounts on its low-grade ore. Probably of the majors, Vale, so the Brazilian iron ore miner, is the most undervalued. I mean, we've had a change in administration in Brazil last year. So, we've had a much more – well, government interfered more in the management of Vale. So, they pressured Vale not to renew their CEO's contract. And there's other influences there, which I think is one of the reasons that the shares are down.

Look, Vale also has a base metals business, copper and nickel, which is – I mean, it's basically – still basically iron ore, but that's another potential attraction should they demerge and spin that off and maybe even sell it into – or merge with someone else, that part of the business. So, yeah, we think Vale is maturely undervalued at this stage.

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