In this special edition of Macro Monday, we speak to Campbell Parry, senior research analyst, about the performance and outlook for the mining sector, with particular focus on copper.
In this video, he explains how the listed miners have responded strongly to rising commodity prices and increasingly bullish profit projections. Earnings upgrades, meanwhile, have been faster than those of the overall market, resulting in strong outperformance for the sector.
Despite having to deal with significant change over the years, miners have been able to maintain sales and improve profitability, says Parry. “This means they’ve been able to generate significant free cash flow by maintaining capital discipline, and to de-gear their balance sheets,” he adds.
As a result, the industry has created positive economic value added (EVA) for four full years, and the sector now has a consistent dividend yield of 4% and higher.
Parry says a lot will depend on commodity prices, and he takes a closer look at copper in particular.
The copper case
Copper is central to the investment case for a number of leading mining companies on the JSE (alongside the likes of iron ore, the platinum group metals and a number of other commodities). However, copper has a number of tailwinds driving its performance, both cyclical and structural.
On the cyclical side, Parry cites the global economic recovery (supported by rising confidence and policy stimulus), strong apparent demand growth in China, cost inflation, low exchange inventories, scrap supply constraints and speculative positioning.
On the structural side, he lists poor internal rates of return (which has resulted in a lack of investment and limited new supply options), declines in average grades (down about 50% since 1980) and higher strip ratios and costs (because of mines being older and deeper), as being supportive of copper prices.
Parry also looks at the rising importance of environmental, social and governance (ESG) factors as drivers of copper demand.
In particular, he points to the ‘electrification of everything’ drive. “A strong legislative push for net zero emissions of greenhouse gases will require a radical reset of the world economy, and a lot more copper,” he says.
“Mining companies have performed very well against most benchmarks of late, which is partly a function of them being better managed, more focused, leaner and in significantly better financial shape than they’ve ever been,” Parry concludes. “The outlook looks to be more of the same, and better, based upon strong cyclical and structural tailwinds, with copper as a good example.”
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