Not related to lithium or PLS specifically but still...

Not related to lithium or PLS specifically but still interesting….

Forget banks, it’s time to start buying mining stocks

Money has flowed disproportionately to the big four and Wesfarmers, but headwinds are starting to turn into tailwinds for the resources sector.

Paul TaylorJun 2, 2024 – 5.00am

Headwinds are starting to turn into tailwinds for the mining sector. Louie Douvisnormal
Over the past year, we have seen a strong performance from the Australian banking sector as well as consumer companies like Wesfarmers. There is an argument that these sectors have benefited from investors avoiding resource stocks, which have been affected by China’s economic challenges, and the supermarkets, which have faced increased regulatory pressure.
Copper is at a two-year-high, gold is at all-time highs, while oil and iron ore are flat to improving on the same period last year. Critical transition materials such as lithium and nickel appear to have bottomed and are recovering. Markets have been disciplined and supply could be constrained if mines become loss making. Commodity prices are also normally a good inflation hedge, a positive factor when inflation is likely to be a little bit stickier.
Second, China is stabilising.
The Chinese sharemarket, which has been under the radar, has made a strong recovery this year and seems to be climbing its wall of worry. Many investors had given up on China after a tough couple of years, but the further drip feed of positive news could see the good performance continue. There has also been market speculation that, given limited liquidity in China, investors were shorting resource stocks to reflect their negative view on the country. So, might a mean reversion be in the air?
Third, resource companies more broadly are in good health with strong balance sheets. They are being disciplined in their approach to new supply and have maintained their focus on delivering good shareholder returns.
The companies are also indicating that it is much cheaper to buy existing companies and mines than build new mines, as seen in BHP’s recent takeover offer for Anglo American. This is a very bullish signal for the sector.
And finally, geopolitics may also be impacting the industry and contributing to limited new supply.
Panama recently shut down the Cobre Panama copper mine, and increasingly it seems new supply is being sought from jurisdictions with greater risk, which means it can be turned off very quickly. All of this adds to the tightness of supply and demand in the industry and potentially supports stronger commodity prices.
While we now see more cyclical tailwinds, when we look at investing in resource companies, we always focus on the mine cost of production and where the mine sits on the cost curve. While most mines will benefit from a cyclical upswing in commodity prices, it is those low-cost, tier one mines that will perform strongly through the cycle.
When commodity prices come down, the low-cost mines should still be profitable and incentivised to expand production. It is the high-cost mines that will need to close or be mothballed when commodity prices are weak. Low-cost mines like Greenbushes for lithium (part-owned by IGO) and the Pilbara for iron ore (BHP and Rio Tinto) should do well throughout the cycle.
Markets are driven by fear and greed and bounce between the two extremes. This means that there are always companies that are over-loved and over-hated. It just might now be the resource companies’ time in the sun.