Livewire Markets: The end of the mining cycle? 22.8.18

After a stellar two-year run that saw the ASX 300 Metals & Mining Index more than double, it has slipped by 10% in 3 months as trade tensions and China data hit sentiment. So, is this the beginning of the end for the current cycle, or it is just another speed bump along the way? In this week’s Thematic Discussion, Ben Clark from TMS Capital hosts Romano Sala Tenna from Katana Asset Management and Michael Wayne from Medallion Financial. Tune in to hear them sort the ore from the waste as they discuss where we are in the cycle, what they are looking for this results season, and some themes and stocks they think still present opportunities.

Where are we in the cycle?

Michael Wayne: We saw a big run-up over the last couple of years, but the heat has started to come out. We’ve seen iron ore and copper start to pull back, and that obviously affects some of the bigger players. There are also question marks over China, and whether the same stimulus is going to come through in the next 6-12 months that was there 12 -18 months ago. So given where we are at the moment with prices, given where we are with the US dollar, we’re pretty sanguine and think we’re probably mid to late-cycle.

What to look for in results

Michael Wayne: A lot of people say when it comes to commodity companies you’re meant to sort of buy them on a high PE and you sell them on a low PE. When we look at these businesses, we’re looking at the balance sheet. We’re looking to see how much debt is on the balance sheet, whether there’s enough cashflow coming through to pay off that debt. In Australia, a lot of the mining companies have really repaired their balance sheets in recent times.

There’s going to be a lot of cash paid back to shareholders. The question is whether or not the same amounts of cashflow are going to be delivered going forward, and also what are these companies going to do with their cashflow? Are they going to go out and make large scale acquisitions, or are they going to be a bit more conservative and return that cash back to shareholders.

Some sectors and stocks to look at

Michael Wayne: We don’t mind the Australian gold space that was touched upon just then. Basically we prefer the Australian gold players that produce here domestically, that way they incur their cost in Australian dollars and they’re selling their gold in US dollars. So an environment like we’ve seen where the Aussie dollar has come back from 80 cents towards sort of 72 cents I think is a really big tail wind. So your quality players such as your Northern Star (NST), your Evolution Mining (EVN) with high grade assets, long mine life, and low cost of production are probably the area we’re looking for at the moment.

When we’re looking at the energy space at the moment, we’re not confident that OPEC is going to maintain the production cuts that we’ve seen over the last couple of years, and that goes to Russia as well. Basically all the production that’s come out of the market has been replaced by the US shale oil. So for us, that space is a little bit uncertain and we’re far less confident about the outlook for the oil price than we are for the Australian dollar gold price.

The view on mining services

Michael Wayne: We think that the mining services sector’s probably mid to late-cycle along with the broader commodities space. Contracts are going to be harder to come by. But we like to differentiate the sector into two parts:

The ones that are involved in the capital expenditure projects (the large developments of mines and building of the infrastructure).
Then you have those mining services companies that are involved in more operating expenses and just running these mines at a steady state.

So you think about something like Austin Engineering (ANG), or a McMahon Holdings (MAH), they provide parts to a lot of these miners and services to a lot of these miners and engineering services et cetera. So given where we are in the cycle, given that we’re unlikely to see a repeat of the commodities super cycle from five, 10 years ago, I think many of these mines will start to operate at a steady state. You want to be involved in those mining services businesses that help these mines continue to operate, as opposed to expand.


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By | 2018-08-27T05:05:25+00:00 August 27th, 2018|Articles|