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. The construction and engineering industry also played a pivotal role in building the nation. With a strong pipeline of projects in roads, highways and public infrastructure, the industry contributed GVA of A$133.78 billion in 2020.  

Key Trends Driving the Industrials and Mining Sector

The Surge in Engineering Construction: With strict lockdown measures in Sydney and Melbourne, the construction activity was affected, with the value of construction falling 0.3% in September 2021 (on a QoQ basis) to reach A$53.93 billion. The decline is not as much to fear, which only indicates the recovery is underway. Moreover, the engineering activity remained resilient, with the value of engineering work done rising 0.4% in September 2021 quarter (on a QoQ basis) to reach A$23.49 billion.

Figure 1: Engineering Construction Showing Resurgence:

Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group

Gaining Momentum in Capex: With improving sentiments, companies are increasingly spending on buildings and structures and plant and equipment. Total capital expenditure swelled 4.4% in June 2021 quarter (on a QoQ basis) to reach A$32.67 billion. Reopening of the economy and easing measures saw increased spending by retailers on buildings and structures. Capex on buildings and structures increased 4.6% to reach A$16.89 billion in June 2021 quarter (on a QoQ basis).

Uproar in Exploration Expenditure: Exploration activities showed traction with spending on mineral exploration rising 3.7% in June 2021 quarter (on a QoQ basis) (on a seasonally adjusted basis) to reach A$878.3 million. Companies are increasingly investing in drilling programs with meters drilled increased by 5.5% in June 2021 quarter. Given the rally in gold prices following the pandemic and accommodative policy stance by advanced economies, gold mining companies are increasingly investing in capex plans.

Figure 2: Rally in Exploration Expenditure:

Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group

Alluring Mining Exports: Australia’s mining sector made a record exports earnings in 2020-21, reaching A$310 billion. The rebound in industrial production and faster rollout of vaccines in many advanced economies has led to an increase in exports. According to The Office of the Chief Economist’s (OCE) Resources and Energy, Export Values Index went up by 49% over September 2020 quarter levels. The infrastructure spending bill of US$3.5 trillion by the US government is expected to augur the demand for Australia’s mining exports. Notwithstanding weaker demand from China, iron ore prices hit a decade high, reaching over US$230 in June 2021.

Index Performance

The ASX 200 Industrials (GIC) Index and The ASX 300 Metals & Mining Index posted 5-year returns of +27.64% and +71.78%, respectively. Increased infrastructure spends by the government, upsurge in metal prices, rapid industrialization and adoption of low emission technologies, and climate change regulations are some of the factors driving the sector performance.

Figure 3: The ASX 300 Metals & Mining Index (AXMM) outperformed the ASX 200 Index in the past five years by whopping ~37.29%.

Source: REFINITIV as on 25 November 2021

Key Risks and Challenges

The lockdown disrupted the supply chain, impacting prices of some base metals with copper posted a steep increase. Softening of construction activity in China and government intervention to cap energy use and emission has pulled down prices of iron ore. Increasing virus spread in Europe may slowdown industrialization, which in turn hurts export growth. Unable to withstand wage hikes, construction companies in Australia posted a 5.5% drop in gross operating profits in June 2021 quarter. Gradual rollback of accommodative policy stance following increasing inflation rates may affect the global economic expansion.

Figure 4: Key Risks in Industrials and Mining Sector:

Analysis by Kalkine Group

Outlook

Australia’s mineral export earnings for 2021-22 have been upwardly revised by 13% in the recent forecasts to reach A$349 billion, according to the Department of Industry, Science, Energy and Resources. A spurt in demand for electric vehicles and new energy technologies is expected to augur demand for copper, aluminium, lithium, and nickel. Copper is entering a stronger demand phase, and world consumption is expected to reach 27 million tonnes in 2023. US President Joe Biden recently signed a $1.2 trillion bipartisan infrastructure bill to support the transportation, broadband, utilities sector. This is expected to drive the demand for base metals. In the 2021-22 budget, the Australian government has committed A$15.2 billion to invest in new infrastructure projects. This will create over 30,000 jobs directly or indirectly across the nation. This is part of a A$110 billion investment package for the next ten years to build the nation’s infrastructure. Some of the notable projects that are covered under the program include Melbourne to Brisbane Inland Rail, Metronet passenger rail network in Perth, Monash Freeway upgrade in southeast Melbourne.

II. Investment theme and stocks under discussion (NST, AMA, RSG, DOW)

After understanding the sector, let us now look at four 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 Ltd)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$11.26 billion)

NST is engaged in the exploration, mining and processing of gold deposits and sale of refined gold. It owns and operates Kalgoorlie Operations and Yandal Operations.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 18.72% on 25 November 2021. Moreover, the stock might trade at slight premium compared to its peers’ average EV/Sales (NTM trading multiple) given the stable cash flow generation and quality assets. For valuation, peers such as Evolution Mining Ltd. (ASX: EVN), Newcrest Mining Ltd. (ASX: NCM), Regis Resources Ltd. (ASX: RRL) are considered. Given the upsurge in gold production during September 2021 quarter, healthy balance sheet, revised dividend policy, and valuation, we give a “Buy” recommendation on the stock at the current market price of $9.785, as on 25 November 2021, at 03:59 PM (GMT+10), Sydney, Eastern Australia. In addition, the stock has delivered an annualised dividend yield of 1.96%.

2. ASX: AMA (AMA Group Ltd)

(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$450.86 million)

AMA is engaged in the distribution of automotive aftercare parts, consumables, and accessories to Australia.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 18.82% on 25 November 2021. Moreover, the stock might trade at a slight discount compared to its peers’ average EV/Sales (NTM trading multiple) given the lower repair volumes affected by mobility restrictions. For valuation, peers such as Eagers Automotive Ltd. (ASX: APE), MotorCycle Holdings Ltd. (ASX: MTO), Super Retail Group Ltd. (ASX: SUL) are considered. Given the synergies from the recent acquisitions, adequate liquidity, valuation, and current trading levels, we give a “Speculative Buy” recommendation on the stock at the closing price of $0.430, down by ~3.37% as on 25 November 2021.

3. ASX: RSG (Resolute Mining Ltd)

(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$419.49 million)

RSG is a gold mining company with operating assets in Australia and Africa. Its portfolio includes Syama Gold Mine and Mako Gold Mine.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 19.31% on 25 November 2021. The stock might trade at a slight premium compared to its peers’ median EV/Sales (NTM trading multiple) considering the drilling updates at its Syama North mine. For valuation, peers such as St Barbara Ltd. (ASX: SBM), Sandfire Resources Ltd. (ASX: SFR), Westgold Resources Ltd. (ASX: WGX) have been considered. Considering the management commitment in reducing debt, decent liquidity with proceeds of US$90 million from sale of Bibani Gold Mine, current trading levels, and valuation, we give a “Speculative Buy” recommendation on the stock at the closing price of $0.375, down by ~1.316% as on 25 November 2021.

4. ASX: DOW (Downer EDI Ltd)

(Recommendation: Hold, Potential Upside: Mid-Single-Digit, Mcap: A$4.03 billion)

DOW provide engineering services to rail, road, power, telecommunications, mining, and resources sector in Australia, New Zealand, Asia and the Pacific.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 7.42%% on 25 November 2021. The company might trade at a slight premium compared to its peers’ median EV/Sales (NTM trading multiple) considering the diversified revenue streams and decent scalability. For valuation, peers such as Monadelphous Group Ltd. (ASX: MND), CIMIC Group Ltd. (ASX: CIM), Johns Lyng Group Ltd. (ASX: JLG) are considered. Given the realization from the recent sale transaction of its Open Cut East mining assets, share buyback plan, and valuation, we give a “Hold” recommendation on the stock at the closing price of $5.850 as on 25 November 2021. In addition, the stock has delivered an annualised dividend yield of 3.58%.  

Note: All the recommendations and the calculations are based on the closing price of 25 November 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 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.

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