Current economic conditions have been challenging for the mining industry. Demand for a lot of commodities has been under pressure following tighter monetary policy, pushing prices down. At the same time, inflation’s putting pressure on costs. The result is narrower margins and lower profits from the 2022 highs.
Optimism is still partly held back by challenges in the Chinese property market, recession risk in major economies, and lower demand in the near future for energy transition materials.
But we think there are signs conditions are improving.
Inflation’s on the way down and it looks like interest rates might have peaked in some key economies, with rate cuts on the cards over 2024. Demand in China has held up better than a lot thought and key regions like India are showing strength.
We look at three companies we think are well placed to capitalise on the positive trends.
This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments and any income from them will rise and fall in value, so you could get back less than you invest. Past performance is not a guide to the future. Ratios also shouldn’t be looked at on their own.
Investing in an individual company isn’t right for everyone because if that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.
BHP
BHP is a mining giant from Australia and the steelmaking industry is vital to its success, with a huge iron ore operation and a smaller business in steelmaking coal. But there’s other strings to its bow – copper is a key part of the business and a focus area for growth. Other areas for growth are smaller assets like nickel and potash (used in farming).
Like a lot of the sector, recent performance has been hit by lower sales prices and inflated costs, which are expected to remain elevated this year. But BHP has an ace up its sleeve, helping mitigate the impact.
Its iron ore operation, Westen Australia Iron Ore, is the world’s lowest-cost major producer and a leading spot for some of the lowest copper production costs. For through-the-cycle investing (holding through the ups and downs), low costs are an attractive quality.
Iron ore is still the cash cow though, pulling in around 60% of last year’s $28bn cash profit (EBITDA) and enabling investment in other areas. That makes China a key region, it’s the world’s biggest steelmaker (which needs iron ore). Even with a rocky post-Covid-19 recovery, and a troubled real estate sector, demand for steel has been relatively strong. It’s an asset we like the look of over the medium term.
Growth will be more about optimising existing assets, instead of spending more looking for new locations. BHP already has the world’s biggest copper reserve, second-biggest nickel sulphide resource and are in the process of building a major potash mine. There’s plenty to be getting on with at home and financials are strong enough to support investment.
BHP currently trades at a premium to some of its closest peers. Given its cost leadership and opportunities to expand existing sites, that feels about right. But it does add risk, especially in a cyclical sector. We think this would be a good opportunity for longer-term investors, looking to hold a miner through the cycle. Of course, there are no guarantees.
Warrior Met Coal
Warrior is solely focused on steelmaking (met) coal. Not to be confused with thermal coal used in energy production. Met coal is a key component in the steelmaking process with a lower environmental impact than normal thermal coal.
It mines in the US and ships to metal manufacturers across Europe, South America, and Asia. Met coal is a premium product and we think it has high potential. If you want the best steel, you need the best met coal. A high-quality product also helps cut carbon emissions in the steelmaking process.
Driven by expansion in India, Southeast Asia and restarting blast furnace operations in Europe we see ongoing demand growth for met coal.
But as countries continue to decarbonise, new steel-making processes are becoming more popular. These new processes aren’t using met coal so it’s a structural headwind to contend with, but we expect further penetration to be a slow process.
Supply issues are also supporting prices. High-quality met coal is only produced in a handful of locations and big players have recently been cutting production, highlighting how fragile supply is.
Prices spiked mid-way through 2021 and have come down since. Consensus is for cash profit to come down around 27% this year as well, to $730mn. But we’re seeing prices normalise at higher levels than in the past, paving the way for higher through-the-cycle profits. Economic woes could put a spanner in the works.
The balance sheet is in good shape, with net cash of $510mn. Growth investment is focusing on a new project that’s expected to offer very low-cost production when ramped up over the next couple of years. The return profile looks attractive. But with an estimated cost of around $825mn, it’s expensive, and there’s always risks in developing new sites – so it’s one to watch.
We think Warrior could make a good addition to a diversified portfolio for those looking to take on extra risk with a company solely focused on a specific commodity. We urge investors to remember that mining performance tends to move in cycles, and shareholder distributions partly rely on commodity prices.
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Glencore
Glencore is a wide-reaching diversified miner and trading house. Thermal coal has been a big part of its story in recent years, as the energy division drove profits while prices spiked over 2022. While prices have normalised, profit from the coal division still made up almost half of the group’s $9.4bn cash profit over the first half of last year.
But a path away from coal is now a reality after a deal to buy a majority stake in rival Teck’s steelmaking coal business was announced. The current plan is to pay down some debt over the next couple of years and then spin out the newly acquired carbon steel business with the existing energy coal division.
We like this move, mining thermal coal is controversial with some and this gives investors a choice on whether to have exposure or not.
Of course, there are hurdles before the coal plans become a reality. From a growth standpoint, Glencore’s focusing on the future. Copper, zinc and nickel are all metals needed to drive an energy transition and are key investment areas.
One stands above the rest though, attracting the lion’s share of investment, and that’s copper. Should the coal spin out go smoothly, the new Glencore will heavily lean towards copper – it’s a metal we see strong demand for over the medium term.
Glencore also has a huge commodity trading arm. Performance relies more on volatility in the market than whether prices are high or low, which offers a nice degree of diversification. This business is very complex with a lot of moving parts. Investors should think about the risk that brings.
We should also note the recent $1.5bn provision for dealing with corruption fines from past governance issues. Anti-corruption policies have improved more recently, but there’s still work to be done to restore investor confidence.
Glencore offers something different from other mega miners, and trading at 1.5 times forward book value puts it at a discount to most peers. The trading arm is a diversifier, and exposure to coal whether as part of the current business or via a spin-off could still be attractive to some investors. We don’t think the valuation is too demanding, but caution on hurdles ahead.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.