Looking Ahead: Mining Trends 2019

Last year, we reflected on a feeling of optimism and an upbeat vibe as we returned home from Indaba.

Was it borne out? Broadly yes. As we look ahead to another few days in Cape Town, there’s a sense that investor confidence is there for the right opportunity. So in 2019 what is the right opportunity? The answer is, unsurprisingly, far from straightforward. Take gold which is at an interesting inflexion point. The received wisdom is that demand for gold rises in times of economic uncertainty and political upheaval. Most people would agree that we have both of those in 2019. We also have historically low interest rates, yet the price of gold has remained remarkably stable over the last five years, hovering at around $1,200 and $1,250 an ounce. In fact, gold prices struggled in 2018 largely because of decisions made by the Federal Reserve, which hiked its benchmark interest rate. That boosted the value of the US dollar, which was already strong thanks to tax cuts and deregulation.

Despite its performance in 2018, many analysts believe a bull market for gold is imminent. Capital Economics said in its 2019 outlook that gold would reach $1,300 an ounce, with $1,400 possible by the end of 2020. J.P. Morgan has a similar view. It says $1,460 an ounce is possible next year.

Away from gold, demand for lithium and cobalt continue to reflect the development of the electric vehicle (EV) market. Manufacturers require lithium and cobalt to make batteries – and they are rapidly increasing demand. According to Bloomberg, there are currently more than three million electric vehicles on the road. By 2025, Volkswagen alone will build three million a year.

This might sound like good news for lithium and cobalt miners. However, it has raised concerns about the different supply-side dynamics of these two raw materials. In short, prospects are far better for lithium than for cobalt. This is because virtually all the world’s lithium supply occurs as a primary product in brines or hard-rock ores. And supplies are dispersed worldwide – in Australia, China, and Latin America. By contrast, most cobalt supply is produced as a by-product of copper and nickel mines – most of which are located in a single (unstable) country: the Democratic Republic of the Congo (DRC).

Of course, investors don’t make decisions solely on the basis of raw material. They also have to consider the market and the nature of the company. This is not always straightforward. Diversification might, on the surface, seem good for mitigating risk. However, the truth is that most demand for iron, ferroalloys, metallurgical coal, zinc, and nickel comes from one source: construction. So in practice, these elements are inextricably linked to each other. When demand falls for one, it falls for them all.

Whilst specialists lack the economies of scale of diversified firms, and typically depend on a single market advantage, this is something that is hard for competitors to replicate. In the coming year, investors will need to think carefully about the above ‘micro’ factors such as company type, raw material and region. But they will also have an eye on the key ‘macro’ factor influencing the global economy: the Chinese slowdown.

Without doubt, China is slowing. For 2018 as a whole, China’s GDP expanded by 6.6 percent – its lowest since 1990. This is significant, since Asian countries consume more than two-thirds of the worlds steel, nickel, copper, aluminum, lead, and zinc. China’s slowdown is already having an impact on mining. For example, at the start of 2019, copper fell to a near two-year low of $2.54 a pound on the Comex market in New York. That was down 30 per cent in a year.

Despite these many challenges, the mining market and, in particular, London, will always throw up opportunities for investors and corporations. Mining is heavily reliant on ‘traditional’ sources of capital, particularly in key jurisdictions. Globally, these sources of growth capital are being depleted by a number of competing phenomena, including ETFs and new sector focuses. London is relatively unique in the key mining jurisdictions in retaining this ‘traditional’ focus, with a substantial market, relatively few mining companies, with very few (42) having a market capitalisation in excess of $500m. When an abundance of capital supply collides with a scarcity of investable companies, the result is a significant opportunity. This lack of competition has real benefits, not least the potential for better valuations. We’ve seen LSE-listed companies trade at a premium across a variety of market valuation analyses.

For multinationals, a dual listing on the London markets remains an attractive option. London has a support ecosystem of experts who can help prospective companies achieve a listing. Memery Crystal is one of them. Our team boasts specialist understanding and experience in public or private debt, equity, acquisitions or disposals. In the last twelve months we have acted for 60 percent of the mining companies that have listed in London as well as advising many more. We will be at Indaba, and we’d be delighted to meet you.