4 ways to get value from mining
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Christine St Anne is Morningstar's online editor.
Russell Investments portfolio manager Scott Bennett is seeing very attractive opportunities in the mining sector.
"The metals and mining sector has generally underperformed the market by about 20 per cent for the past year. We think with that kind of discount to the market, it's looking relatively good value at the moment," he said in a recent interview with Morningstar.
Given the attractive opportunities on offer, Russell has reweighted the Russell Australian Value ETF (RVL) in favour of mining companies.
Global investment firm BlackRock is also seeing attractive valuations in mining. A shortfall in the supply of some commodities could push up metals prices, according to BlackRock chief investment officer (CIO) Evy Hambro.
"In the face of even modest assumptions around demand, supply may struggle to keep pace, especially as mining companies defer growth plans. Indeed, looking forward a few years, it is possible to see deficits opening up in some metals markets," Hambro says.
As CIO of BlackRock's natural resources equity team, Hambro says mining is a sector that is rife with investment opportunities.
He says mining company valuations have come under pressure this year because of slowing global growth, cost inflation, strikes and disappointing output.
However, Hambro and Bennett say while valuations are attractive, it is important to be selective when it comes to investing in the sector.
"The mining sector is definitely attractive from a valuations point of view, but that is not to say it is without its risks," Bennett says.
BlackRock recently released a paper in which it highlighted its four criteria for investing in the mining sector:
1. Natural discounts
As noted earlier, looming supply gaps for most metals have made natural resources equities attractive.
BlackRock says miners currently trade at a discount to the prices of the underlying metals they dig up. Metal prices, if sustained at current levels, will support higher equity values.
Russell's Bennett says the sector saw a large sell-off in commodity prices this year, with iron ore prices falling to $86 a tonne (from $150 a tonne highs in April).
"There was a lot of value coming out of the sector as a result of the fall in commodity prices. However, prices for commodities such as iron ore are now coming back to more sustainable levels and this will make valuations in the sector attractive," Bennett says.
2. Miners to choose and miners to avoid
BlackRock likes copper producers because the supply challenges will most likely keep prices well above marginal production costs.
The investment firm also says low-cost iron ore miners look attractive because the industry contains many high-cost producers.
According to BlackRock, the miners to avoid are most aluminium makers because of high inventories and production costs, nickel miners because of new supply, and zinc producers because of sluggish demand and oversupply.
BlackRock has also avoided most pure explorers because the chances of finding commercially viable deposits are slim.