Investors this year have been grappling with changing technology, resulting in a bumpy ride for stock markets. One thing that does look certain, however, is that demand for finite critical minerals is set for a long runway of growth, partly driven by the very same technological advances.
Strength in several commodity prices has been driving an uplift in sentiment towards the sector. But the cyclical nature of basic materials means it’s wise to take a long-term view. The biggest guns of diversified mining have posted their annual report cards, and we’ve extracted the themes that investors should care about.
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. 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.
The copper boom continues
Copper’s exceptional conductivity, thermal efficiency and corrosion resistance makes it a vital material for infrastructure, electronics, transport and power generation. Growing energy demand, the artificial intelligence (AI) and data centre buildout, rising defence spending, and the drive towards electrification are just some of the megatrends this reddish metal is exposed to.
And against this backdrop, production is also set to decline (more on this later), painting a positive picture for long-term pricing.
Copper demand and mining production
Copper is becoming increasingly more important for the established diversified miners and was a key driver of BHP’s 25% increase in underlying cash profit (EBITDA) growth, accounting for more than half of the total for the first time, and with pipeline potential to increase production by around 40% over the next 10 years, there could be more to come.
Copper was also the key profit driver for Anglo American despite a dip in volumes. Glencore was another name where strong pricing more than compensated for falling production. Meanwhile, record production and lower unit costs in Rio Tinto’s copper operations help to offset lower profitability in Iron Ore.
Increasing copper production remains challenging
With many of the world’s most attractive copper deposits reaching maturity, cost-effectively increasing production isn’t easy. Lower grades at Anglo American’s Latin American properties mean there was less copper recovered for every tonne of ore sent for processing. Glencore faced similar issues in its first half, although those issues look to have been largely resolved.
Both Glencore and BHP have an attractive pipeline of development projects, but they’ll require significant investment and carry an element of execution risk. Anglo American’s organic growth plans focus on incremental increases at existing properties, which offer slower but less capital-intensive growth.
Rio Tinto’s hopes for higher production rest with the ramp-up of Mongolia’s Oyu Tolgoi mine. Opened in 2024, it’s set to become one of the world’s largest copper mines by 2030. But as it stands, Rio is more exposed to iron ore, where soft demand from China is weighing on the outlook.
Deal making is not always the answer
Rio Tinto and Glencore had been deep in merger discussions in recent months as producers looked for a fast-track route to scaling up. However, Rio Tinto has now walked away from a potential tie-up with Glencore, with disagreements over management control and valuation proving to be too big a gap to bridge.
We think Glencore’s declining coal business may also have been a deciding factor. Management should be credited for exercising financial discipline, but there are some question marks over what Rio does next to refresh its strategy.
Anglo American’s planned merger with Canada’s Teck Resources looks to be making smoother progress, and if it completes as expected, the deal will create the world’s fifth-largest copper producer. There are plenty of synergies to be had too, but an integration on this scale won’t be without its challenges, and it’s not too late to rule out a last-minute counter-offer from a competitor.
What about rare earth minerals?
Sky-high trade tensions, and the strategic importance of high-end electronics in defence and AI have seen major international powers draw up plans to reduce their dependence on China for so-called rare earth minerals.
These naturally occurring compounds are essential not only for these industries but also renewable energy technologies and electric vehicles.
However, mineral extraction is technically challenging and price volatility can be extreme. So far, it’s not a space that the mainstream miners have invested heavily in. With few established names to choose from, we see the space as higher risk than the rest of the sector.
Have valuations gone too far?
Mineral resources companies are inherently price takers rather than price makers. So forecasting is much less accurate than for companies that have more control over the prices they charge.
Right now, valuations are boosted by strong commodity prices, which elevates the chances of downside risk. Even commodities with strong fundamentals can see sharp falls based on short-term shifts in supply and demand. Investors who try to second-guess these fluctuations are likely to get their fingers burnt.
For those willing to tolerate some uncertainty, quality operators should outperform the wider sector over time. Attractions to look for are a spread of materials likely to benefit from structural demand growth, geographic diversity, competitive production costs, robust resource bases and the financial firepower to fund investment.
BHP is one name that scores well on these criteria, and increasingly so, Anglo American. On the latter name, however, merger progress is likely to be the main short-term driver of sentiment.
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 LSEG. These estimates are not a reliable indicator of future performance. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss. Yields are variable and not guaranteed.
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.