1. UK Metals & Mining Market Landscape

The mining of commodities is directly related to global trends, and China is the critical driver of the metal and mining sector as it consumes the majority of the commodities. The global growth, spending on infrastructure projects and encouraging credit policies are a few of the factors that support the mining industry. In Q3 2020, the metal prices increased, which were supported by the recovery in industrial demand and consumption in China as the covid-19 lockdown eased. The price in Q3 2020 was also underpinned by the disruption on the supply side in South America. The World Bank's Metals and Minerals Price index soared by 19.5% quarter on quarter in Q3 2020, which made up for the losses incurred in the first half of 2020. The metal prices are expected to fall by 1% in 2020; however, they are expected to increase by 2% in 2021. Australia, Brazil, China and India are some of the largest metal and mining countries in the world.

The World Bank's Precious Metals index increased by 16.5% quarter on quarter in Q3 2020, as the uncertainty over covid-19 continued, and the investors moved to safe-haven assets. The weakening US dollar and disruption on the supply side boosted the prices. The precious metals included in the index are gold, silver and platinum.

The UK is a prominent player in the metal and mining industry as some of the world's largest mining companies are based out of the UK. Fresnillo, Antofagasta, Centamin, Polymetal International, Rio Tinto and BHP Group as listed on the LSE. The UK also has large deposits of minerals that include energy minerals such as coal, construction minerals such as aggregates, brick clay and cement raw materials, industrial minerals such as kaolin & ball clay, silica sand, gypsum, potash, salt, industrial carbonates, fluorspar and barites and metal minerals such as tungsten and gold. Construction and infrastructure sector in the UK is the key driver of the non-energy minerals sector. The minerals produced in the UK are mainly used domestically, and it is a net importer of minerals and metals. 

Key Metals Mined in the UK

• Tungsten-tin: It is used for cutting and drilling of metalworking and construction industries. The major deposit of this metal is in Hermerdon, near Plymouth.
• Gold: It is used in jewellery, for investment, and due to its corrosion-free property, it is also used as a conductor in the electronics. In Omagh, Northern there is an open-pit mine in operation, and there is also a deposit at Curraghinalt, Northern Ireland.
• Zinc-Copper-Lead: These metals are used in electric wiring, batteries, and alloys to give protection to rusting. Parys Mountain has a zinc-copper-lead deposit in North Wales, UK. The deposit is expected to have resources of around 2.1 million tonnes at 6.9% combined base metals and 4.1 million tonnes at 5.0% combined base metals in the inferred category.

Mining Project Life Cycle

Exploration and Discovery: The aim is to find and attempt to quantify the minerals contained in the deposit. Appraisal: Assessment of the economic value of the asset, which includes scoping, preliminary economic assessment, pre-feasibility and feasibility study. Development: This stage includes processes such as engineering construction and commissioning. Production: Extraction of ores and processing of ores is done in this stage. Closure: Once the ore depletes over time, steps are taken to bring down the operations.

Factors Driving the Mining Costs

• Labour: The labour costs in the mining industry are highly susceptible to inflationary pressures. The upward pressures on the wages weigh down on the margins and profitability. In some of the regions, the workers in the mining sector work under the union, and this put pressure on the increase in wages.
• Energy Supply: Mining sector consumes a large amount of energy, and in some cases, the cost of the energy constitutes a third of the total cost base. Choosing the energy mix is a strategic decision among other factors as it influences the social and reputational implications, in a remote location, which energy source needs to be used is an important decision.
• Royalties & Tax: The government charges money for allotting licenses of the mines and imposes a tax on production and sale. At times the government charges royalty fees apart from the one-time license fee.
• Capital Good & Machineries: The mining activity requires heavy machinery and production units, and it is a capital intensive business. Investment in machinery constitute a significant portion of the mining cost, and they help in discovering and extracting mineral resources.

Risk Exposure to the Mining Sector

• Social and Political Instability: This can result in business disruption that can be due to a lack of local government service or high violence and crime rate in the country.
• Infrastructure Dependency: Breakdown and failure of the mining infrastructure can affect the safety of the employees, and it can disrupt the operation, causing expensive and time-consuming repairs.
• Environmental Impact of Mining Activities: The pollution caused by mining can damage the environment and may contribute to climate change.
• Regulatory Impositions: Changes in the regulatory environment leads to an uncertain investment environment, which can affect in raising funds for the operation of mines. Delay in approval of mining licenses can impact the business.
• Safety Incidents: Any issue related to the health and safety of the people working at the mines lead to litigation and decrease the overall value of the Company.

Benchmark Index Performance

Based on 1-year performance, the mining sector performed better than FTSE-100 and FTSE All-Share, but the performance was below the FTSE AIM All-Share index. In the last one year,  the FTSE All-Share Mining index generated (-8.92%) return, which was better than FTSE-100 (-21.54%) return and FTSE All-Share (-19.82%) return. The FTSE AIM All-Share index return was (+6.49%) in the last 1-year.

Fig 5: One Year Index Performance

(Source: Refinitiv, chart created by Kalkine Group)

SWOT Analysis

Metals & Mining Sector Outlook

The global economic conditions remained highly uncertain during 2020 due to the health crisis. As per the IMF forecast, the global GDP is expected to shrink by 4.4% in 2020. The global commodity demand is expected to remain subdued in 2020, and it is expected to witness a slight gain in 2021. The metal prices declined in 2020, and they are expected to post a modest increase only in 2021, which will majorly be driven by demand from China. A prolonged weaker growth in the global market will suppress the prices and recovery in demand.

The covid-19 has put economies into recession, and it has impacted the commodity market as well. In between January and April 2020, the metal prices declined by 15%, which recovered due to the supply shock and early recovery in China's industrial activity. Overall, the metal prices are expected to witness a slight fall in 2020, with a 1.1% decline in 2020. Metal prices are expected to grow by 2.1% in 2021.

Aluminium prices increased by 14% quarter on quarter in 3Q 2020, and the price was supported by increased imports in China, a slight demand by the brewers in the US and a gradual recovery from the auto sector. Aluminium prices are expected to fall by 7.5% in 2020 and then increase by 1% in 2021. Copper prices increased by 22% quarter on quarter in Q3 2020, which was driven by stockpiling in China and also by a temporary disruption on the supply side. The price of copper is expected to increase by 1% in 2020 and 4% in 2021. Iron ore price increased by 25% quarter on quarter in Q3 2020 following the demand for steel production in China. The iron ore price is expected to grow strongly by 7% in 2020, and it is expected to fall by 2% in 2021 as supply from Brazil gradually recovers. 

In the short-term, demand volatility and price uncertainty will remain. In the medium-term, an uneven recovery is expected, with a climate action and policy uncertainty and in the long-term, growth in population & wealth, electrification of transport and decarbonization of power would be the key driver.

2. Investment Analysis and Stocks Under Discussion (POLY, CEY, EVR, SLP)

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

A. Polymetal International Plc (LON: POLY)

(Recommendation: Buy, Potential Upside: 14.76%, Market Capitalization: GBP 7.73 billion)

Polymetal International produces gold and silver, and it has assets in Russia and Kazakhstan. The Company has a portfolio of nine gold and silver producing mines and a pipeline of future growth projects. Polymetal International is listed on the London Stock Exchange, Moscow Stock Exchange and Astana International.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of ~14.76% over the closing price of GBX 1,740.00 (as on 3 November 2020).

B. Centamin PLC (LON: CEY)

(Recommendation: Buy, Potential Upside: 15.84%, Market Capitalization: GBP 1.43 billion)

Centamin PLC is a gold producer, and it has a mineral resource of around 15.3 Moz. The Company has an interest in Sukari Gold mine, Doropo project, Batie West project and ABC project. Sukari Gold mine is located in Egypt, Doropo project and the ABC project is located in Côte d'Ivoire. Batie West project is located in Burkina Faso. Centamin is listed on the FTSE-250 index. 

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of ~15.84% over the closing price of GBX 130.15 (as on 3 November 2020).

C. Evraz PLC (LON: EVR)

(Recommendation: Hold, Potential Upside: 8.19%, Market Capitalization: GBP 5.23 billion)

Evraz PLC is UK based company, which is engaged in integrated steel, mining and vanadium business. The Company has operations in Russia, the US, Canada, the Czech Republic and Kazakhstan. It is among the top steel producers, and it is listed on the FTSE-100.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of ~8.19% over the closing price of GBX 365.90 (as on 3 November 2020).

D. Sylvania Platinum Limited (LON: SLP)

(Recommendation: Hold, Potential Upside: 11.70%, Market Capitalization: GBP 174.74 million)

Sylvania Platinum Limited is engaged in the business of retreatment of PGM-bearing chrome tailings. The Company is a low-cost producer of platinum group metals. The Sylvania Dump Operations consist of six chrome beneficiation and platinum group metal (PGM) processing plants located in Eastern and Western limb of Bushveld Igneous Complex (BIC). The Company is listed on the FTSE AIM.                                                                                                                                                                                                                     

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of ~11.70% over the closing price of GBX 64.00 (as on 3 November 2020). 

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

*The "Buy" recommendation is also valid for the current price as covered in the report as on 4 November 2020.

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.

The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.

Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.