Morningstar’s Mining Landscape report outlines the current themes impacting the industry, the industry value drivers that investors should look out for, and the outlook for the industry.

The report also includes an assessment of the current opportunities in mining. Most of the mining companies in our coverage list have large market capitalisations, operate numerous mines are exposed to multiple commodities. Moats, which indicate the ability to maintain a sustainable competitive advantage are rare. The following stocks are considered materially undervalued.

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Newmont ASX:NEM ★★★★★

  • Primary commodity: Gold
  • Moat rating: None
  • Uncertainty rating: Medium
  • Fair Value Estimate: $50 (30% discount at 11 March 2024)
  • P/E: 18.8
  • Yield: 2.8%

Newmont is the world’s largest gold miner, with a portfolio reflecting three major deals in recent years. First, it acquired fellow gold producer Goldcorp for a relatively mild premium in 2019. Not only did it avoid paying a high price, Newmont also extracted better performance at mines where Goldcorp struggled.

Second, it combined its crown jewel Nevada assets with Barrick Gold's in a joint venture called Nevada Gold Mines, or NGM, also in 2019. With Barrick as the operator, Newmont owns 38.5% of the partnership, which reduced costs given the proximity of mines owned by the joint venture. Newmont also acquired Australian-based gold miner Newcrest in 2023.

As a commodity producer, Newmont is a price taker. This means that they do not set the prices and they must accept the price the market sets. Newmont needs low-cost mines with long lives and a low installed capital base to support the longer-term excess returns needed to justify an economic moat. We assign a no-moat rating to Newmont.

The acquisition of Newcrest in November 2023 extended Newmont's lead over Barrick Gold as the world's largest gold miner, with 2023 sales of roughly 7.3 million ounces of gold from its mines in the Americas, Australia, Papua New Guinea, and Ghana. The combined company also has material copper production of roughly 160,000 metric tons as well as numerous development projects that we think are valuable and perhaps overlooked.

We think Newmont's shares are undervalued given its weak sales volumes in 2023, which have led to elevated unit cash costs. However, we think sales volumes will recover, helping lower unit cash costs and driving some improvement in the enlarged Newmont's current position around the middle of the cost curve. Gold miners have also generally been out of favour due to concerns over rising real interest rates, which increase the opportunity cost to hold gold.

Newmont is undervalued by 30% at 11 March 2024, with a Fair Value estimate of $50.

Iluka ASX:ILU ★★★★

  • Primary commodity: Diversified
  • Moat rating: None
  • Uncertainty rating: High
  • Fair Value Estimate: $9.50 (29% discount at 11 March 2024)
  • P/E: 13.3
  • Yield: 1.3%

Iluka is a global mineral sands miner. Major mines are Jacinth-Ambrosia in South Australia and Cataby in Western Australia. Relatively low operating costs for zircon are supported by Jacinth-Ambrosia, but its reserve life is less than a decade. Like the industry, Iluka is facing a declining grade profile at its mines, but a constrained outlook for supply should support prices.

Mineral sands prices and volumes are the primary drivers of our fair value estimate. Iluka's focus is on managing volumes and the resulting impact on prices. Efforts to maintain margins and prices mean sales volumes can fall in periods of weak demand as Iluka shoulders part of the responsibility for balancing industry supply, but Iluka can also flex production to increase market share or liquidate excess inventory as prices rise. Primary products are split between zircon (used in tiles and ceramics, refractories, chemicals, and so on) and titanium dioxide feedstocks rutile and synthetic rutile (used for pigments in paints, coatings, plastics, and paper).

We assign Iluka Resources a no moat rating. As a commodity producer, Iluka is generally a price taker and needs low-cost mines with long lives and a low installed capital base to support the longer-term excess returns needed to justify an economic moat.

Iluka is currently undervalued by 29% at 11 March 2024, with a Fair Value estimate of $9.50.

Whitehaven Coal ASX:WHC ★★★★

  • Primary commodity: Coal
  • Moat rating: None
  • Uncertainty rating: Very High
  • Fair Value Estimate: $9.50 (26% discount at 11 March 2024)
  • P/E: 4.5
  • Yield: 3.3%

Whitehaven Coal offers exposure to global energy and steel demand via thermal and metallurgical coal production. Its mines are in New South Wales.

Favourable coal prices are critical to generating excess long-term returns, but on this front we're circumspect. Poor coal prices in response to the global recession caused by the coronavirus along with production difficulties at Narrabri saw the firm's balance sheet quickly deteriorate. However, from losses in fiscal 2021, elevated coal prices in the wake of the Russia-Ukraine war saw the company quickly repay debt and move into a net cash position.

Whitehaven is a price-taker, meaning maintainable competitive advantage requires low capital and operating costs and long-life mines. Its early mines had relatively high operating costs and produced mainly thermal coal. Narrabri and Maules Creek in particular have reduced group cash costs and increased semisoft metallurgical coal production. However, coal mining is a capital-intensive business and some assets were acquired through relatively expensive acquisitions, the cost partly recovered through the use of overvalued shares.

Whitehaven is currently at a 26% discount to its fair value of $9.50 (at 11 March 2024).

Looking for more insights from our Mining Landscape report? Read a Mining basics article here.


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