Commodity Prices in Mining Sector Supportive; Some Opportunities Available

Commodity prices have generally stabilized after falling on concerns that China’s reopening would underwhelm, along with worries over a recession in the West. Even so, they remain elevated versus history and cost-curve support. The Russian invasion of Ukraine and subsequent sanctions on Russia support energy prices and reinforce the importance of energy security.

Miners’ earnings and margins are under pressure from increasing labor, fuel, logistics, and other expenses, though inflation looks to be moderating. Balance sheets are strong and dividends and buybacks are a priority, but high prices are incentivizing miners to tilt to growth, with mergers and acquisitions up. Many miners are also increasing production through extensions to, or expansion of, existing mines. As a result, capital and exploration expenditure is increasing.

Though volatile, most miners’ share prices changed little in the quarter and the average price/fair value estimate is 0.92 as at Sept. 13. Thermal coal miner no-moat Whitehaven WHITF is materially undervalued, trading at a 35% discount to our fair value estimate as of that date, which we think is due to many investors shunning investing in coal. Cash flows are strong due to elevated thermal coal prices, with excess cash likely to be returned to shareholders via dividends and share repurchases, though the firm recently paused its buyback while it also considers growth options.

A modestly lower gold price reflects renewed concerns over further interest rate rises, which increases the opportunity cost to own gold. This in turn is affecting the share prices of gold miners, which are also undervalued in our view, led by no-moat Newmont NEM and Barrick Gold GOLD. The companies trade at discounts to our fair value estimates of 27% and 23%, respectively, as at Sept. 13.

With Newmont’s proposed acquisition of no-moat Newcrest NCMGY likely to occur, we also think Newcrest is undervalued with its shares trading at a 22% discount to our fair value estimate.