Should You Take a Deep Dive into the Mining Sector?

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Australian Economy, Macro Economics

Mining sector is gaining traction once again based on the strong performance seen since mid of last year. The gains for the sector in April were noted after some bit of a fall witnessed in February and March that entailed the reporting season. Further, with the weaker US dollar staying in there, the market is realizing that the commodity price recovery story is intact. The share price gains are expected to be backed by global growth that remains robust with a positive outlook emerging on the sector.

The trend finds support from S&P/ASX 300 Metal and Mining Index which was seen to be up 1.01% on April 18, 2018 with a 25.3% rise seen in last one year. So far, the index has been up over 7% in this month; and has outperformed the broader S&P/ASX300 index.

Worth noting are the recent production updates from miners like Rio Tinto and the week laden with numbers expected from players like BHP Billiton and South32 that showcase the refocus of investors on the sector. For example, BHP has been benefitting from the favorable commodity pricing environment lately. The group is managing its EBITDA margin well with a decent balance sheet position; and has introduced a dividend reinvestment plan which is expected to be operational for the FY18 final dividend. The group’s underlying EBITDA for H1FY18 was up by 14 per cent as compared to H1FY17. Capital and exploration expenditure guidance was unchanged and remained at US$6.9 billion for FY18 and is expected to remain below US$8 billion per annum in FY19 and in FY20. BHP Stock has risen about 10% in last six months.

Equities dealing in commodities like nickel and copper are also getting some boost lately. For instance, Western Areas Ltd has witnessed a stock price rise of 11.5% in last one month. Lithium sector is again gearing up based on Electric Vehicles’ Industry Trends.

One thing to understand is that the mining companies have some issues to address to keep on maintaining their output. For instance, the automation system used for exploration etc., needs an isolated area to ensure the safety of the people working in the mine, and a steel mesh gate is a vital first physical barrier. Then for higher utilization rates, automated loaders are used but these add complexity to the operation. Thus, mining at deep levels is challenging and the peer pressure among companies to behave responsibly while establishing legitimacy with local communities without any impact on production becomes a key imperative to run a successful business. Not all miners can live up to the expectations of the communities and markets and thus need to work well with regards to the business operations.

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BHP Daily Chart (Source: Thomson Reuters)

Coming back to the commodity cycle scenario, one still needs to be wary of the moderating growth in China while miners with good fundamentals are retaining their strong positions with support from price movements. Thus, this boils down to having a balanced exposure to the sector to leverage from the favorable commodity scenario.


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