1. UK Mining & Energy Industry Landscape

The 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.

The Energy sector plays a key role in the United Kingdom’s economy. Moreover, oil & gas accounts for 75% of the UK’s energy needs. The industry employs approximately 280,000 people in the UK. Brent Crude recently touched USD 140 per barrel because of the bans put by the US on Russia's energy exports together with European leaders. Oil & gas are also the primary feedstocks for several industries such as pharmaceuticals, plastics, cosmetics, and domestic appliances.

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.

Several Mining stocks with a large exposure to Russia such as Evraz, Petropavlovsk, Polymetal and Eurasia Mining witnessed a plunge in share price. 

Key Trends in the Mining & Energy Sector

Risk Exposures to the Mining & Energy Sector

• 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.
• Environmental Impact: The failure to adopt or apply ethical standards and environmental compliance can contribute to climate change. The manufacturing industry is already one of the most regulated industries, and the regulatory environment is becoming more complex.

SWOT Analysis

(Analysis by Kalkine Group) 

Metals & Energy Sector Outlook

The commodity price witnessed a major boost as the ongoing fears regarding the more sanctions on Russia resulted in a surge in raw materials cost. The London Metal Exchange recently halted the trading on Nickel as price rose by more than 100% within few hours because of panic buying. The price of Platinum, Palladium, Oil & Gas also soared as the war in Ukraine threatened the supply of raw materials. On 08 March 2022, Britain confirmed that it would phase out Russian oil imports by the end of 2022. It will provide market, businesses, and supply chains sufficient time to replace Russian imports. Furthermore, the oil sanction does not apply to Russian natural gas, which represents approximately 4% of the UK supply. As the UK stock market plummeted due to the Russia's invasion of Ukraine, the UK mining and energy stocks still continued to witness a decent rally.

 

2. Investment analysis and stocks under discussion (GEMD, TRIN, and VVO)

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

A. Gem Diamonds Limited (LON: GEMD)

(Recommendation: Speculative Buy, Potential Upside: 15.27%, Market Capitalization: GBP 62.47 million)

Gem Diamonds Limited (LON: GEMD) is an FTSE Main Market listed mining Company based in the UK. The Company owns Ghaghoo mine in Botswana and Letšeng diamond mine in Lesotho.

GEMD's full year results for the period ended 31 December 2021 will be released on 17 March 2022.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group) 

From a technical standpoint, the stock is hovering around the lower Bollinger band, indicating an upside potential in the stock price. Moreover, the 14-days RSI of ~36.03 approaches an oversold territory.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 15.27% over the current price of GBX 43.80 (as of 09 March 2022 at 08:10 AM GMT).

B. Trinity Exploration and Production PLC (LON: TRIN)

(Recommendation: Speculative Buy, Potential Upside: 10.47%, Market Capitalization: GBP 54.63 million)

Trinity Exploration and Production PLC (LON: TRIN) is an FTSE AIM All-Share index listed independent oil production company. The Company focuses on Trinidad & Tobago and operates a portfolio of both onshore and offshore development assets.

One Year Share Price Chart

(Source: Refinitiv; Analysis done by Kalkine Group)

From a technical standpoint, the stock price is trading above the 50-days (GBX 129.13) and 100-days (GBX 133.23) simple moving average, indicating a bullish price momentum.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 10.47% over the current price of GBX 147.06 (as on 09 March 2022 at 09:04 AM GMT).

C. Vivo Energy PLC (LON: VVO)

(Recommendation: Watch, Potential Downside: 30.72%, Market Capitalization: GBP 1.73 billion)

Vivo Energy PLC (LON: VVO) is an FTSE 250 index listed company founded in 2011. It is engaged in oil refining and markets under the Shell brand to retail and commercial customers.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the momentum indicator 14-day RSI (~63.27) 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 30.72% over the current price of GBX 136.40 (as on 09 March 2022 at 08:30 AM GMT).

Investors can evaluate the stock based on the support and resistance levels provided in the report in case of keen interest taking into consideration the risk-reward scenario. 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any 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.

Note 3: Target Price refers to a price level that the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 4: ‘Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.’

Note 5: Dividend Yield may vary as per the stock price movement.  

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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