Investors looking to buy into miners obviously are heavily influenced by commodity prices, which are largely driven by Chinese demand. There is more than the usual amount of uncertainty about how the Chinese economy is travelling, but China has once again lowered its interest rates in order to stimulate the economy, and Beijing has signalled that it is also prepared to pull the fixed-asset-investment lever to rejuvenate its economy.
Most commodity prices should be able to at least hold at current levels: despite economic uncertainty, the fact is that there is not much in the way of new capacity coming to market to drive prices down. Miners have been mostly busy replacing volume from declining assets, rather than developing new capacity.
Here’s a look at five mining situations, across different commodities, that appear to be good value at present.
1. Fortescue Metals Group (FMG, $4.01)
Market capitalisation: $12.5 billion
Estimated FY19 dividend yield: 6%, fully franked
Analysts’ consensus target price: $4.69
For a one-commodity producer that sells a discounted product, Fortescue Metals still looks an attractive proposition, as it works to bring to the market a higher-grade product than that for which it has been known. For a decade, Fortescue has sold iron ore to China that are between 56%–59% iron, compared to the 62% ore of the benchmark price. It was of course the business genius of Andrew Forrest to realise that China would buy that ore – which Rio Tinto did not want – even if it paid less: however, in recent years, Fortescue faced the downside of its business model, as the discount that its Chinese steel-mill customers paid widened from the typical 15% to the benchmark index price, to about 36%.
That drove a profit slump of almost 60% in FY18, but Fortescue is starting to turn that around, bringing higher-grade products to its mix. First iron from the “West Pilbara fines” – which are 60.1% iron – will be shipped next month: about 5 million tonnes–10 million tonnes is expected to be delivered in the second half of FY19. The company expects West Pilbara Fines to represent between 2.9%–5.8 per cent of its export volumes this year.
Longer-term production of West Pilbara Fines will be underpinned by the Eliwana mine, which is currently being built and expected to be completed in the 2021 financial year. Fortescue said in September that it would ship about 40 million tonnes per year of West Pilbara Fines for 20 years once Eliwana was up and running, with the higher-grade product reaching about 23.5% of export volumes in the future (assuming no other deposits of it are found.)
On the cost front, Fortescue just keeps bringing its cost of production lower – it is down to a cash cost at present of US$12.36 a (wet) metric tonne. With the benchmark price above US$70 a tonne, Fortescue has given itself the ability to absorb much lower prices.
The bottom-line for investors is that Fortescue is poised for earnings and (possibly) dividend growth over the next couple of years at least, and appears to represent a sound source of capital growth and dividend yield.
2. South32 (S32, $3.16)
Market capitalisation: $16.2 billion
Estimated FY19 dividend yield: 8%, fully franked
Analysts’ consensus target price: $4.21
Spun off from BHP Billiton in May 2015, at $2.13, South32 was initially viewed as a collection of the parent’s unwanted assets – it was created to hold BHP’s non-core aluminium, manganese, nickel and zinc mines – but the company has well and truly made a mockery of this view, peaking at $4.23 last month before the price reacted poorly – arguably, over-reacted – to South32’s September quarterly report.
Alumina production fell 11%, quarter-on-quarter, to 1.2 million tonnes, and thermal (energy) coal fell 10%, to 6.6 million tonnes. But manganese production lifted 8%, quarter-on-quarter, to 1.5 million tonnes, while coking (steelmaking) coal production surged 39%, to 1.5 million tonnes.
The quarter was not that bad, especially as it came after South32 exceeded expectations for FY18, reporting a 9% jump in revenue, to US$7.55 billion, and a 16% rise in underlying earnings, to US$1.33 billion.
And the company is in expansion mode. In August, South32 completed the $US1.4 billion ($1.88 billion) purchase of Canadian zinc, lead and silver company Arizona Mining, which the Australian group believes has a world-class zinc and silver deposit, the Hermosa-Taylor project, which will move it into the ranks of the world’s major, low-cost zinc producers by 2021. Not only will Hermosa-Taylor replace Cannington, South32’s ageing silver, lead and zinc mine – which probably has less than 10 years left as a producer – it could diversify South32 further, into copper.
With US$2.8 billion ($3.8 billion) of cash on hand, South32 should easily be able to cover the Arizona Mining purchase, complete the final $US400 million ($550 million) of its $US1 billion share buyback by April 2019 and still maintain its 40%-of-earnings dividend. In A$ terms, Thomson Reuters’ analysts’ estimates collation sees the stock offering an 8% fully franked yield at the current price, with plenty of scope for the stock to move higher as well.
3. Whitehaven Coal (WHC, $4.33)
Market capitalisation: $4.4 billion
Estimated FY19 dividend yield: 11%, unfranked
Analysts’ consensus target price: $6.00
Leave your ideology at the door with Whitehaven Coal. The company, which shipped 20 million tonnes of coal in 2018, says it is on track to double its output of premium-priced coal – both thermal (electricity) and coking (steelmaking) coal – within the next 10 years. Its saleable production guidance for FY19 envisages 22 million tonnes–23 million tonnes.
Whitehaven Coal is Australia’s largest independent coal producer: it has four open cut mines in north-western New South Wales (Maules Creek, Werris Creek, Tarrawonga and Rocglen) and one underground mine (Narrabri) and operates a coal handling and processing plant at Gunnedah. The company is developing its Vickery mine in the Gunnedah coal basin, and this year, Whitehaven moved into Queensland’s Bowen Basin, buying the undeveloped Winchester South coking coal project from Rio Tinto: according to Whitehaven, a developed Winchester South will potentially have a mine life of 20–30 years, producing up to 15 million tonnes a year.
Aside from its steel-mill market, Whitehaven is tapping into rising demand from Asia for high-energy, low-emissions (HELE) electricity plants, to which its low-ash, low-sulphur thermal coal is very well-suited. “We are seeing more countries make the pragmatic choice to incorporate HELE coal into their energy mix for the simple reason that it does not require them to choose between their economic development aspirations and their emissions reduction obligations,” says Whitehaven: using its coal allows the governments of Japan, South Korea and Taiwan to reduce their carbon emissions by up to 30%. That won’t ever earn Whitehaven any praise from GetUp! and the social justice warrior generation, but it is a growing business. The International Energy Agency’s (IEA’s) base case New Policies scenario predicts that coal demand globally will continue to increase until at least 2040, particularly from Whitehaven’s main markets, in Asia.
Whitehaven’s growing business is churning out money – it paid out $595 million to shareholders in FY18. At present, Japan, Taiwan and South Korea are the main buyers of its thermal coal, with India, South Korea and China the top markets for the steelmaking coal.
According to the collation of analysts’ estimates by Thomson Reuters, Whitehaven will lift earnings per share (EPS) by 34% in FY19, to 69.9 cents, and boost its unfranked dividend by more than three-quarters, to 47.5 cents (analysts see lower EPS and dividends in FY20). While the dividend is not franked, it is a prospective 11% yield, which, when added to an analysts’ consensus target price of $6, amounts to a more than reasonable investment case for Whitehaven Coal.
4. Dacian Gold (DCN, $2.18)
Market capitalisation: $490 million
Estimated FY19 dividend yield: n/a
Analysts’ consensus target price: $3.10
Gold miner Dacian Gold might be a relatively new producer – its Mount Morgans mine near Laverton in Western Australia, which it bought in 2012, only started producing gold in March this year – but the company is well on its way to its goals of establish Mt Morgans as a 200,000 ounce-a-year producer, with potential to move to true Tier-1 status through exploration success taking that to 300,000 ounces.
The Mt. Morgans mine comprises three prospects: the underground Westralia mine area, the open-pit Jupiter mine area and the recently discovered (2016-2017) Cameron Well prospect. It also includes a recently built processing plant capable of treating 2.5 million tonnes of ore a year.
During the September quarter the resource was upgraded to 3.5 million ounces of gold, with the measured and indicated component of that boosted by 11%, to 2.5 million ounces, with an update expected by the end of the year.
Operations at Mt. Morgan are currently building toward what the company describes as “steady-state” production, by which it means 8,000 tonnes a day production from the two mining centres at Mt Morgans – 5,000 tonnes a day from the Jupiter open-pit and 3,000 tonnes a day from the three declines at the Westralia underground mine. Dacian is now looking to declare “commercial production” by the end of December, which could be a substantial boost for a share price that has missed out on the local gold sector’s recent run.
At an all-in sustaining cost of A$1,000 an ounce, Dacian is not the cheapest potential Australian producer, but that would still allow for a very healthy margin at the current gold price of A$1,690 an ounce. However, profit and dividend remain some way off.
5. Metals X (MLX, 39 cents)
Market capitalisation: $272 million
Estimated FY19 dividend yield: 2.5%, unfranked
Analysts’ consensus target price: 82.5 cents
Metals X is a major tin producer, through its half-ownership of the Renison tin mine in Tasmania; it also produces copper from its Nifty mine in the East Pilbara region of Western Australia; and the company is also developing its Wingellina nickel-cobalt project, in Western Australia, considered to be a world-class project.
Metals X is one of the few listed tin producers in the western world: it produces 3,370 tonnes of tin concentrate a year from the world-class underground mine at Renison, and is planning to boost tin production by 40% through the retreatment of approximately 100,000 tonnes of tin in historic tailings, in the Renison Tailings Retreatment Project (Rentails), which is currently in the environmental approvals process.
The company is also among the top ten Australian copper producers, from Nifty, which Metals X picked up in August 2016 through the takeover of Aditya Birla Minerals Limited. The company says its objective is to transform Nifty into a large-scale, long-life mine producing more than 40,000 tonnes a year of copper in concentrate. However, Metals X has had operational problems at Nifty, which resulted in the managing director and chief operating officer departing the company, and the difficulties have been reflected in a sinking share price this year (from $1.21 to 39 cents), which looks to have opened up significant value – provided that new CEO, mining engineer Damien Marantelli, can show improved progress toward getting Nifty running at the projected rate.
Wingellina is a potential bonus. It is part of Metals X’s Central Musgrave Project, which has a mineral resource containing about 2 million tonnes of nickel and 154,000 tonnes of cobalt, within which Wingellina itself hosts an ore reserve of about 1.56 million tonnes of nickel and 123,000 tonnes of cobalt.
Metals X is cashed-up, having raised $50 million in August. Thstock is a dividend payer – but unfranked – with 1 cent expected by analysts this year, rising to 2 cents in FY19, which would boost the yield at the current share price to 5.1%. If the news flow is good regarding Nifty and Rentails, the stock could re-rate higher reasonably quickly.
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