UK Metals and Mining Sector Landscape

Mining plays a vital role in economic growth and development in many countries. The mining of commodities is directly related to global trends, and China is the primary driver for the mining sector. It also produces raw materials for other sectors, including agriculture, automotive, among others. The United Kingdom has many natural mineral deposits, including coal, tin, copper, and even precious metals like silver and gold are found here. The British Isles, particularly in England, have provided metals and mineral resources for hundreds of years. According to a thinktank, the market size of the global base metal mining sector is anticipated to surge at a CAGR of 4.1% between 2019 to 2025. The demand is likely to be propelled by the rising demand for base metals from the electronics, construction, and automotive sector.

Key Trends in the Metals and Mining Sector

• Technological Advancements – The extraction and deep mining activities are now supported by digital transformation to meet the rising metals demand for end-use industries. It also helps ensure low maintenance, corrosion resistance and longevity of metals, which can further propel the market growth.
• Growing Demand from End-Use Industries – The advent of electric vehicles, soaring requirement for aluminum and copper products, and carbon emission regulations are likely to drive the demand for metals.

Risk Exposures to the Metals and Mining Sector

• Covid-19 Pandemic - The scale and continually evolving nature of the COVID-19 pandemic are causing unprecedented disruption to the supply chain, which can lengthen sales cycles and impact the cash flows.
• Operational Risk - The growth trajectory can also be impacted by various factors, such as increasing freight rates, and operational risk regarding production stoppages or equipment failures.

SWOT Analysis 

Benchmark Index Performance

Based on the last six months performance, the FTSE All-Share Industrial Metals index has outperformed the FTSE 100 index, FTSE 250 index, and FTSE AIM UK 50 index. The FTSE All-Share Industrial Metals index generated a return of about 73.27%; however, the FTSE 100 generated a return of around 20.81%, FTSE 250 produced a return of around 24.08% and the FTSE AIM UK 50 index generated a return of about 24.29%.

Figure 1: Six Months Benchmark Index Performance

 (Source: Refinitiv, chart created by Kalkine Group)

Metals and Mining Sector Outlook

The global demand for copper is projected to rise owing to the growing infrastructure and automotive sectors. Similarly, the market size of global zinc is expected to register a CAGR of 4.4% from 2019 to 2025 due to the increasing demand from the galvanization industry. Regarding Gold mining, the uncertainties arising from US-China trade tension and Brexit, followed by dented economic indicators after the Covid-19 outbreak, has further encouraged investors to reconsider Gold as a traditional hedging tool in times of turmoil. Moreover, the economic downturn has devalued the Forex market, which is compelling investors to switch to more tangible metal resources. Furthermore, central banks have been adding to the gold reserves since the financial crisis. Presently, the official reserves are more than 5,000 tonnes higher than they were in 2009. The central banks own nearly 35,000 tonnes of Gold, equivalent to ~17% of worldwide above-ground stocks. According to the rating agency, Moody’s, Aluminium, Zinc, and Nickel will remain in surplus for 2021, with aluminium demonstrating gradual recovery while nickel and zinc will grow as production level normalize.

2. Investment analysis and stocks under discussion (POG, PAF, RIO)

After gaining insights into the metals and mining sector, we would look at the business model of three metals and mining players listed on the London Stock Exchange.

A. Petropavlovsk PLC (LON: POG)

(Recommendation: Buy, Potential Upside: 20.49%, Market Capitalization: GBP 1.08 billion)

Petropavlovsk PLC (LON: POG) is an FTSE 250 listed Company, which is focused on the mining of precious and non-precious metals. Moreover, the Company has three primary operating mines - Pioneer, Malomir and Albyn. The Company is also listed on the Moscow Exchange.

                                                                                                                                                                                   

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 20.49% over the closing price of GBX 27.18 (as of 20 April 2021).

B. Pan African Resources PLC (LON: PAF)

(Recommendation: Speculative Buy, Potential Upside: 20.07%, Market Capitalization: GBP 345.18 million)

Pan African Resources PLC (LON: PAF) is a UK based company that is engaged in the business of gold production. It is a constituent of the FTSE AIM UK 50 Index.

On 15 September 2021, the Company will release its 2021 financial results.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 20.07% over the closing price of GBX 17.84 (as on 20 April 2021).

C. Rio Tinto PLC (LON: RIO)

(Recommendation: Hold, Potential Upside: 9.05%, Market Capitalization: GBP 99.39 billion)

Rio Tinto PLC (LON: RIO) is an FTSE 100 listed metal and mining company that produces iron ore, aluminium, copper, diamonds, and other minerals. The Company has its footprints in over 36 countries around the globe. Moreover, the four broader sets of product group encapsulate Aluminium, Copper & Diamonds, Energy & Minerals, and Iron Ore. RIO has an integrated network of 16 iron ore mines in the Pilbara, Western Australia.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 9.05% over the closing price of GBX 5,955.00 (as on 20 April 2021).

*All forecasted data and peer information have been taken from Refinitiv, Thomson Reuters.

*The "Buy/Speculative Buy” recommendation is also valid for the current price as covered in the report as on 21 April 2021.

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