1. UK Metals & Mining Industry Landscape

The Metals and Mining industry encompasses a list of Companies engaged in the extraction, beneficiation, and processing of naturally occurring solid minerals from the earth. The mined commodities include coal, iron, copper, or zinc, and industrial minerals such as potash, limestone, and other crushed rocks. 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. The British Isles, particularly in England, have provided metals and mineral resources for hundreds of years.

The mining industry in the UK covers around 13,000 companies, which represented almost 0.5 per cent of all businesses. Moreover, the UK’s extractive resources industry got dominated by energy minerals, such as oil, natural gas, and coal, as it accounted for over 92 per cent of revenues from all resources extracted, followed by industrial minerals such as potash, silica, and china clay. 

Key Trends in the Metals & Mining Sector

Risk Exposures to the Metals & Mining Sector 

• UK GDP: The UK economy witnessed a slowdown as the GDP grew quarter-on-quarter by around 1.3% during Q3 FY21, which remained merely lower-than-expected growth of around 1.50%.
• Covid-19 Pandemic: The Omicron variant of the Covid-19 pandemic may adversely impact the top-line business of the Company.
• Health & Safety: The sector uses and manufactures hazardous chemicals, and any mishandling, leakage or accident can lead to injury or death. There needs to be a proper supply chain integration, and stringent safety measures need to be put in place to prevent incidents.
• Government Regulations – Changes in regulations in the mining industry can affect the business environment. The regulatory norms drafted by the government keeps on changing, and thus, it is important to work in line with the regulations set by the government.

SWOT Analysis

Benchmark Index Performance

Based on the last two-years performance, the FTSE All-Share Precious Metals & Mining index has outperformed the FTSE 100 index, but slightly underperformed the FTSE 250 index. The FTSE All-Share Precious Metals & Mining index generated a return of about 9.41%; however, the FTSE 100 produced a return of around 1.47%, and FTSE 250 generated a return of around 11.07%.

Figure 1: Two Year Benchmark Index Performance

(Source: Refinitiv; Analysis done by Kalkine Group)

Metals & Mining Sector Outlook

With reference to the data from the leading industry expert, the production of the UK mining industry grew by around 4.20% during September 2021 when compared with the similar period of the prior year. According to the leading credit rating agency, 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. The mining and metals (M&M) sector growth should be determined based on the pace of adoption of the transformed competitive and operating landscape. Overall, the Companies should focus on shareholder returns and implement bold strategies to enhance productivity and improve profitability to achieve long-term growth.

2. Investment analysis and stocks under discussion (CMCL, FAR, ATYM)

After gaining insights into the Metals & Mining sector, we would look at the business model of three Metals & Mining players listed on the London Stock Exchange. 

A. Caledonia Mining Corporation PLC (LON: CMCL)

(Recommendation: Speculative Buy, Potential Upside: 14.43%, Market Capitalization: GBP 117.36 million)

Caledonia Mining Corporation PLC (LON: CMCL) is an FTSE AIM All-Share listed Gold producer, which has a profitable and cash-generative business with a strong growth profile. CMCL operates through the Blanket Mine in Zimbabwe.

CMCL had paid a quarterly interim dividend of 14 US cents per share on 29 October 2021, while the ex-dividend date was 14 October 2021.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)   

From a technical standpoint, the stock is hovering between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price. Moreover, the 14-days RSI of ~34.33 reflects oversold territory.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 14.43% over the closing price of GBX 920.00 (as of 07 December 2021).

B. Ferro-Alloy Resources Ltd (LON: FAR)

(Recommendation: Speculative Buy, Potential Upside: 11.06%, Market Capitalization: GBP 90.26 million)

Ferro-Alloy Resources Ltd is a Guernsey-based holding company focused on mining, processing, and sale of vanadium-containing ores by-products. Moreover, FAR is also engaged in producing vanadium in the form of ammonium metavanadate (AMV) and other vanadium-containing material

 One Year Share Price Chart

(Source: Refinitiv; Analysis done by Kalkine Group)

From a technical standpoint, the stock price is trading around the lower Bollinger band, indicating an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 11.06% over the closing price of GBX 24.50 (as on 07 December 2021).

C. Atalaya Mining PLC (LON: ATYM)

(Recommendation: Expensive, Potential Downside: 20.77%, Market Capitalization: GBP 559.76 million)

Atalaya Mining PLC (LON: ATYM) is an FTSE AIM 100 index listed mining and development Company, which produces copper concentrates and silver by-products at the wholly-owned Proyecto Riotinto site in southwest Spain.

The Company had paid a dividend of 39.50 US cents per share on 01 December 2021, while the ex-dividend date was 04 November 2021.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the momentum indicator 14-day RSI (~62.10) is inching towards an overbought zone and suggesting a correction in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has a downside potential of 20.77% over the closing price of GBX 414.00 (as on 07 December 2021).

*All forecasted data and peer information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*The "Speculative Buy” recommendation is also valid for the current price as covered in the report as on 08 December 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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