It’s been a pretty impressive 12 months for the world’s top miners.
The FTSE 350 156 995 mining index,
– which includes the diversified mining giants Rio Tinto RIO,
BHP Group BHP,
Anglo American AAL,
and Glencore GLEN,
– has returned 46% to shareholders over the last year, according to FactSet, compared to a 7% drop for the broader FTSE 350.
The sector is benefiting from an increase in the value of the metals they unearth. Copper from the previous month HG00,
futures have risen 62% in the last 12 months, silver SI00,
has earned 51% and PL00 platinum,
has added 32%.
And there are two big trends that should drive the sector further.
The first is the fall of the DXY dollar,
A weak dollar environment increases the purchasing power of major commodity consuming markets, especially China, says Ephrem Ravi, an analyst at Citigroup. A lower dollar also helps to relax global monetary conditions, as much of the world’s corporate debt is denominated in dollars.
As the graph shows, there is usually a strong correlation between mining stocks and the change in the dollar.
Another boost comes from the rise in copper versus gold. The copper-to-gold ratio has risen over the past year, implying optimism about global growth, says Citi’s Ravi. Copper is necessary for manufacturing and construction, while gold is often used as a refuge from ties of financial duress.
Jeffrey Gundlach, CEO of DoubleLine Capital and the so-called king of bonds, has said that the copper-to-gold ratio closely follows yields on US government bonds, which tend to rise as yield improves. economy.
According to Ned Davis Research, citing data dating back to 1995, the European metals and mining industry has outperformed the market with an average annual gain of 9.7% when the economic outlook is improving, but has underperformed. 7.4% per annum when economic prospects are deteriorating. .
Mark Phillips, a European equities analyst at Ned Davis Research, says it makes sense for miners to go through booms and busts. “A boom will begin when an increase in demand for raw materials drives prices up while short-term supply remains relatively fixed. As high prices persist, this incentivizes companies to invest in new projects that have previously been unprofitable, ”says Phillips.
“However, long lead times generally mean that many companies invest in new projects at the same time, creating cost pressures and oversupply, which can come at a time when demand is starting to decline. This results in a drop in prices and mining and metals companies that are at the top of the cost curve go bankrupt, ”he adds.
Also behind the earnings there is talk of a raw materials supercycle. That basically means a cycle that lasts for decades and that moves the commodities as a whole. “The commitment of many nations to be carbon neutral and less energy intensive by 2050-2060 requires significant investment in infrastructure that will be intensive in raw materials. Structural models of commodity prices have shown that at each important stage of economic development – agricultural, industrial, and service – the use of commodities can change, increasing the likelihood of a supercycle in the former. stages of development, ”says Daniel Jerrett, Stategy’s chief investment officer. Capital, which started a global macro fund last month.
There is talk in the market of inflation, driven by a loose monetary policy and aggressive fiscal spending. Analysts at Variant Perception, a research firm, have argued that rising inflation risks, the need to hedge them, and “generationally cheap” prices will lead to a commodity supercycle. Among the major banks, JPMorgan has also endorsed the view of the commodity supercycle.
It’s a lonely bet against the miners right now. There are no short positions against large miners that are large enough to be reported, according to daily updates from the Financial Conduct Authority.
But there are some with dissenting opinions. Ben Davis, an analyst at Liberum Capital, has a sell rating on Rio Tinto and a hold on BHP. The weakness of the dollar, he acknowledges, may help the rally continue, “but it feels like a lot of that in the price.” And Davis doesn’t think raw materials are in a supercycle.
But Davis anticipates a slowdown in Chinese credit, which will soon have an impact. Loan growth has gradually decelerated from 13.2% year-on-year in June to 12.7% in January.
“The reduction in Chinese credit will start to be felt in demand for raw materials and while replenishment in the rest of the world is a very powerful force, it is unlikely to last beyond mid-year. The earliest and largest beneficiary of this cycle has been iron ore, and for that reason BHP and Rio Tinto have the most short-term downside in our opinion, ”he says.