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The sector may be set for a decent rally on supply constraints over the next few years.
The global financial crisis of 2008/2009 is mostly remembered for the collapse of banks and their share prices. But often forgotten is that it also brought an end to the surge in commodity prices and mining company shares. The first decade of the century saw commodity prices across the board rallying with platinum peaking at around $2 000 per ounce and oil hitting $150 a barrel.
Locally, the FTSE/JSE Resources 10 (Resi 10) Index’s all-time high was in May 2008 at just under 78 000 index points while it is now hovering at around 64 000. In the 12 years since that high the mining companies have got themselves into great shape. They’ve paid down debt, been cautious on new projects, shut loss- making or marginal operations and avoided large deals.
Couple that to one of the responses to the pandemic, namely infrastructure build, and we may have a perfect storm for mining stocks that will take the Resi 10 to new highs and well beyond.
US President Joe Biden is likely to allocate large amounts of money to upgrade America’s ageing infrastructure. With China already spending on infrastructure, adding the world’s largest economy (the US) to that demand should see commodity prices shoot still higher.
With soft commodities, such as maize or sugar, the cycles are short as adding new capacity is easy and so any price increase is quickly met with increased supply.
Increasing the supply of hard commodities such as platinum group metals (PGMs), copper, iron ore and the like are much slower as the lead times are much longer. Getting a new mine up to production can potentially take a decade and even just increasing the capacity of an existing mine is a project that will take many years to get up to speed.
So, the cycles are now much longer and as such the price increases we’ve seen in commodities will potentially continue for a couple more years before either demand starts to wane or new production starts coming online to push prices down.
Put altogether we could well be positioned for a decent rally in this sector that will last for at least two or three years and maybe even longer. The low debt also means that we’ll see decent dividend payments, albeit that low debt may also see some miners decide to embark on major projects that could put their balance sheets at risk.
We may also see some major mergers and acquisitions as mine bosses decide the easiest way to increase supply is to buy a competitor. This always worries me, so I’ll watch this closely.
The easiest way to invest in the mining space is with the Satrix RESI ETF but one can also buy the actual miners themselves. However, I would stay away from gold miners. Gold is driven by fear more than anything and in a world that is rolling out vaccines, even if slowly and with some geographies lagging, gold’s run may start to stall. I’d rather look to focus on PGMs and industrial metals.
One side effect of higher commodity prices is that we can also expect a stronger currency as we saw in the initial years of this century. Commodities trade in US dollars and local miners then convert that into rand, creating demand for the currency and hence price strength.
