I. Sector Landscape
Australia’s mining industry accounted for the lion’s share of the national output with Gross Value Added (GVA) of ~A$198.88 billion in 2020, representing ~11.0% of total GVA. The industry is upheld by rich natural resources, increasing investments, strong demand from Asian countries, and various government support programs.
Key Macro Parameters Affecting Mining and Metals Sector
Increasing Private Capital Expenditure: In September 2021 quarter, the total new capital expenditure stood at $32.70 billion, up by 12.9% PcP. Private capital expenditure for the mining sector increased to $9.03 billion, up by 1.2% on a sequential basis. The Australian Bureau of Statistics (ABS) expects capex activity in the Mining industry to clock $41.8 billion in FY22, up by 5.1% from the previous estimate.
Engineering Construction on a Rise: For September 2021 quarter, the total value of work done in construction activities stood at $53.93 billion, up by 3.5% PcP and marginally down by 0.3% on a sequential basis. Engineering construction value stood at $23.49 billion, up by 4.0% PcP and 0.4% on sequential basis.
Figure 1: Trend of Private New Capital Expenditure in Mining:
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Key Driving Indicators for Metals and Mining Sector
Expenditure on Mineral Exploration: For September 2021 quarter, the total expenditure of mineral exploration rises by 4.5% to $925.9 million. Existing mineral deposits edged up by 5.8% and clocked $636.3 million, additionally, new deposits bulged by 11.5% to $346.1 million. Other minerals recorded the largest uptick of 37.8% to $91.1 million. Iron ore recorded the second largest growth of 15.8% and clocked a value of $174.6 million.
Figure 2: Value of Mineral Exploration in Specific Metals
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Key Performance of Selected Minerals
Gold Prices to be Pushed Upwards: The renewed waves of COVID-19 variants on a global scale, and uneven vaccine rollout, is expected to push gold price up to US$1,785/ounce in CY21, post averaging out US$1,770/ounce in CY20. Australia has outpaced China as the world’s largest gold producer in H1CY21. Official gold buying surged by 62% YoY in H1CY21. A desire for growing debt levels, diversified reserves, and rising inflation were the catalyst for central banks’ growing demand for gold.
Iron Ore Prices Retracted but Volume Levels Stands Resilient: Iron ore prices have new retracted sharply from the highs of US$200/tonne sought in May 2021 to July 2021. Diminishing domestic demand for steel in China, primarily due to softening in construction activities and restrictive government policies, has resulted in price falls of over 50% from the peak in mid-September. However, volume levels are expected to incline to 939 million tonnes in FY23 from 868 million tonnes in FY21.
Copper Supported by Low-Emission Technology: Copper prices have inclined in 2021 amid economic recovery and the large use of copper in low-emission technology. Prices are expected to ease from US$9,122/tonne in CY21 to a still strong US$8,650/tonne by CY23. Refined copper consumption is estimated to surge by 4.4% in CY21, and to clock 26 million tonnes, with activity expected to broaden in industrial production.
Index Performance
The ASX 300 Metals & Mining Index posted 5-year returns of +91.90% as compared to the ASX 200 Index gains of +31.27%. Growing government support, prudent affordability measures, rising industrial demand, and improved capital expenditure are supportive factors driving sector gains.
Figure 3: The ASX 300 Metals and Mining Index outperformed the ASX 200 Index in the past five years by whopping ~60.63%.
Source: REFINITIV as on 23 December 2021
Key Risks and Challenges
Total meters drilled in September 2021 quarter slipped to 3,388 million meters from 3,454 million meters, down by 1.9% QoQ, largely attributed to lockdown impact. Post-lockdown recovery has placed workers to cash in on country-wide labor shortage by demanding higher wages, increasing operating costs for the metals and mining sector. World demand for gold slipped by 10% YoY to 1,833 tonnes in H1CY21, led by the robust outflow from gold-backed exchange-traded funds. China’s softening demand for steel has triggered substantial falls in iron ore prices. A renewed wave of COVID-19 variants has curtailed growth in Chinese industrial production and has already closed several important ports used for the shipment of copper.
Figure 4: Key Drivers v/s Key Constraints
Source: Analysis by Kalkine Group
Outlook
Improved Estimates for Mining Capex: The total private capital expenditure in the mining industry is estimated to clock $41.8 billion in FY22, a 5.1% upward revision from the previous estimate, amid global economic recovery and increased industrial demand.
Spurt in Demand for Low-Emission Technology: A spurt in demand for electric vehicles and new energy technologies is expected to augur demand for copper, aluminum, lithium, and nickel.
Gold Export Earnings: Gold export earnings in Australia are estimated to clock $29 billion in FY22, before a shortfall of $27 billion in FY23, as gold prices ease back. Production from old and existing mines is forecasted to increase gold mine production to 378 tonnes in FY23.
Improved Export Volume Prospects for Iron Ore: Australia’s export volumes for iron ore are forecasted to surge steadily, from 868 million tonnes in FY21 to 939 million tonnes by FY23, reflecting the commencement of several mines in Western Australia.
Improved Industrial Demand for Copper: With increased investments in low-emission technologies and economic recovery on the way, Australia’s copper exports are estimated to surge. Export earnings are expected to incline from $11.4 billion in FY21 to $14.4 billion by FY23.
II. Investment theme and stocks under discussion (NST, NIC, AMI)
After understanding the sector, let us now look at three companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘EV/Sales’ multiple method.
1. ASX: NST (Northern Star Resources Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$10.91 billion)
NST is engaged in the exploration, mining and processing of gold deposits and the sale of refined gold. It owns and operates Kalgoorlie Operations and Yandal Operations.
Valuation
Our illustrative valuation model suggests that the stock has a potential upside of 18.43% on 23 December 2021. Considering stable cash flow generation and quality assets, the company might trade at a slight premium to its peers. For valuation, few peers like Mincor Resources NL (ASX: MCR), Alkane Resources Ltd (ASX: ALK), Newcrest Mining Ltd (ASX: NCM), and others have been considered. Given the upsurge in gold production during Q1FY22, healthy balance sheet, revised dividend policy, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the current market price of $9.370, as of 23 December 2021, 02:58 PM (GMT+10), Sydney, Eastern Australia. In addition, the stock has delivered an annualised dividend yield of 2.02%.
2. ASX: NIC (Nickel Mines Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$3.45 billion)
NIC is engaged in mining nickel ore and nickel pig iron in Australia.
Valuation
Our illustrative valuation model suggests that the stock has a potential upside of 18.70% on 23 December 2021. The stock might trade at a slight premium compared to its peers, given signed MoU and robust NPI price momentum in the near term. For valuation, peers such as Mincor Resources NL (ASX: MCR), Alkane Resources Ltd (ASX: ALK), Newcrest Mining Ltd (ASX: NCM), and others have been considered. Considering the current trading levels, a commission of ANI power plant, NPI expectations, growing industry demand for copper, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the current market price of $1.415, as of 23 December 2021, at 01:38 PM (GMT+10), Sydney, Eastern Australia. In addition, the stock has delivered an annualised dividend yield of 2.78%.
3. ASX: AMI (Aurelia Metals Limited)
(Recommendation: Hold, Potential Upside: High Single-Digit, Mcap: A$513.37 million)
AMI is engaged in exploring and mining gold and base Metal in NSW, Australia.
Valuation
Our illustrative valuation model suggests that the stock has a potential upside of 7.28% on 23 December 2021. Moreover, the stock might trade at a slight premium compared to its peers, given increased industrial demand for base metals and a potential increase in gold prices in the near term. For valuation, peers such as Macmahon Holdings Ltd (ASX: MAH), Iluka Resources Ltd (ASX: ILU), Regis Resources Ltd (ASX: RRL), and others are considered. Given the increased topline and relatively favourable NPAT, improving operating cash flows, current trading levels, and upside indicated by valuation, we give a “Hold” recommendation on the stock at the closing market price of $0.435, up by ~4.819%, as on 23 December 2021. In addition, the stock has delivered an annualised dividend yield of 2.40%.
Note: All the recommendations and the calculations are based on the closing price of 23 December 2021. The financial information has been retrieved from the respective company’s website and REFINITIV.
Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and is subject to the factors discussed above.
Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.
Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.
There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.
You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.
The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.
Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.
Please also read our Terms & Conditions and Financial Services Guide for further information.
On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine and its related entities do not hold interests in any of the securities or other financial products covered on the Kalkine website unless those persons comply with certain safeguards, procedures, and disclosures.
Kalkine Media Pty Ltd, an affiliate of Kalkine Pty Ltd, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.