- Miners are taking advantage of depressed prices and engaging in M&A
- With the right strategy, investors can follow a similar approach
- Use basic screens to avoid stocks that are cheap for a reason
Timing the market is an eternal struggle and most serious investors will instead aim for a compromise of buying quality companies at a reasonable entry point. However, as volatility rises in commodities markets, there is an argument for a complementary investment strategy alongside holding stable, blue-chip operators: buy low. Very low.
As tactics go, looking for a rebound is far more of a punt, but with a few guiding rules even investors without extremely high-risk appetites can take a more cyclical approach to buying. Those who do so would be following in the footsteps of some serious heavyweights, as well. Rio Tinto (RIO) raised some eyebrows by acquiring Arcadium Lithium (US:ALTM) for $6.7bn (£5.2bn) last month. It did so at a time when the lithium price had crashed and miners were suspending supply.
When combined with these weak asset prices, the long-term picture encourages buyouts now. Rio Tinto thinks demand for lithium will rise from a current level of around 1mn tonnes a year of lithium carbonate equivalent to over 2mn tonnes by the end of the decade. There will be serious growth in the market despite decelerating demand for electric vehicles.
“In these moments, there’s a kind of Darwinistic adjustment to the stock markets,” says Savannah Resources (SAV) chief executive Emanuel Proença. “You have some players that really suffer because they have projects that are not as competitive.”
Now that a player as globally significant as Rio has backed the lithium demand case, there is some relief in the industry. Savannah, helped by the announcement of a strategic investment from Dutch processing company AMG (NL:AMG), has seen its share price more than double since February. Strike that one off the downtrodden opportunities list.
Taking inspiration from Rio Tinto, we have looked at commodities that could rebound in the coming year and also some of the more depressed UK-listed mining stocks. This is punting, but with some finesse. That said, a scattergun approach is probably wise as miners are talented at wasting opportunities and the risk level is high.
We’ve covered in the past what might be a marker for success in a pre-revenue mining company (usually a management team that has done it before and a project that is low enough cost to survive downturns). For some further guidance, we looked to a specialist. Royalty companies are often interested when others are holding back capital. Ecora Resources (ECOR) chief executive Marc Bishop Lafleche says going with the crowd can be a poor long-term strategy.
“There’s a tendency just to extrapolate the present into the future with commodities and natural resources investing,” says Bishop Lafleche. “You can feel a level of safety investing in the sector at cyclically high prices, but over the longer term, that’s potentially a riskier strategy.”
He used the example of buying a royalty on the Mantos Blancos copper mine in Chile in 2019. “At the time, some market commentators felt like the [internal rate of return] on the deal was actually skinny, assuming $3 per pound copper [$6,600 a tonne]. We took the view that $3 per pound through the cycle was a really attractive position to be in,” he says, noting copper has traded a third higher for much of the past five years. Mantos brought in $2.8mn in the first half, behind only the much larger Kestrel coal royalty in terms of revenue streams for the company.
Ecora itself is a candidate for a bargain purchase, given its share price has halved in the past two years. The declining nickel price has knocked Ecora’s portfolio significantly, and it is approaching the end of its highly lucrative metallurgical coal Kestrel royalty. It’s possible Bishop Lafleche himself bought high through the $185mn purchase of a basket of royalties from South32 (S32) in 2022, although this opinion could also be what he calls extrapolating the present into the future.
The weak nickel market is due to new Indonesian supply, funded by China, that has sent the price down. The metal had been held up as a key energy transition component alongside lithium and copper, but the radical changes to the market in the past few years have seen mines suspended and new projects halted. BHP (BHP) said it would reconsider the West Musgrave mine, on which Ecora has a royalty and on which it suspended operations last month, in 2027.
Scattergun
While markets are not totally efficient, there are enough serious mining investors around. That means most companies will be cheap for a reason.
So in a screen using the worst total return over the past two years as a launching point for underdog purchasing, those that are down more than 80 per cent can mostly be crossed off the list.
Highly risky standouts in that category include Bushveld Minerals (BMN) and Vast Resources (VAST), which have working mines but have struggled with debt and working capital requirements, issuing equity at painfully low share prices.
A stake in Moroccan potash hopeful Emmerson (EML) would be a bet on the country’s government reversing its decision to block the development of the relevant mine, although the company (now down to a £6mn market cap, from £86mn in April 2022) this week warned that the body that rejected its crucial environment and social impact assessment report said there was no way to reconsider the decision.
These are largely company or country-specific problems, even if Bushveld has been knocked around by weak vanadium prices. Companies down 50-60 per cent since 2022 might offer better opportunities. To further narrow the focus, we can use Panmure Liberum’s top commodity picks for the coming 12 months.
These are lithium (more than 100 per cent upside according to Panmure’s price forecasts out to September 2025), cobalt (60 per cent), thermal coal (10 per cent) and platinum group metals (PGM), forecast to improve by a few per cent.
Jubilee Metals (JLP) fits the bill by these metrics. A Simon Thompson pick which we also looked at in August in our feature on mining disruptors, Jubilee extracts PGMs, copper and chrome from waste resources.
Its principal asset in Zambia is a processing plant, which it is ramping up to a capacity of 13,000 tonnes of copper produced a year. This has not gone smoothly this year, hence the share price decline. Weak platinum group metals and chrome prices have also proved a drag on earnings.
Platinum and palladium are cyclically weak, albeit rising demand for hybrid cars could boost prices. Panmure has a balanced view on PGMs compared to the analyst consensus, forecasting platinum at just under $1,100 an ounce (oz) this time next year (consensus is over $1,200). Analyst Tom Price is more optimistic when it comes to palladium, seeing $1,100 an oz by November 2025 (consensus is at $1,000, below the current level).
Sylvania Platinum (SLP) is another PGM player in the doldrums. Even bullish Panmure sees earnings continuing to fall, however, so a sudden move upwards in PGM prices would be needed for a serious re-rating. Its underlying cash profit dropped from $146.5mn in 2021 to $66mn last year, and Panmure has forecast just $12mn for 2024.
Bishop Lafleche notes that picking companies with low costs is important, as it means they can withstand downturns. Jubilee’s business model is based on cheap extraction, while Sylvania has a much narrower margin.
Alongside low costs, a stable balance sheet is necessary for a proper re-rating once the worm turns. This is where Sylvania has an advantage, given its net cash position.
Big fallers can also hold big debts. Petra Diamonds (PDL), down just under 70 per cent in two years, is looking at yet another refinancing. The company has the advantage of being able to dig up individual diamonds worth millions each (recently selling $8.5mn and $4.7mn stones), but the debt load does put a lid on rebound potential.
But this is slightly creeping away from the spirit of buying an underdog basket. Let’s not get too qualitative here. The worst performers screen also offers up Ukrainian iron ore miner Ferrexpo (FXPO), a binary option, for whom an end of the war could bring on massive gains.
A nickel evangelist might look at Lifezone Metals (US:LZM). We’ve strayed across the pond but the company would appeal to those who want some structure – its planned mine is low cost, and BHP is already on board as an investor. That means it could be bought out cheaply, and the major’s involvement helped drive its market cap to almost $1bn in September 2023.
As a final point, the gold companies show what is possible when things go right. Some of London’s best performers over the past two years are gold miners such as Pan African Resources (PAF), Serabi Gold (SRB) and Hochschild Mining (HOC).
Australian operator Evolution Mining (AU:EVN) was already highly rated and so hasn’t doubled or tripled in value like peers. But its executive chair Jake Klein had some good advice for those zigging when others zag: “If you’re doing deals countercyclically, people aren’t cheering necessarily at the time you do the deal,” he said on the Money of Mine podcast in October, referencing deals that had sent his company’s share price down. “You really have to have some fortitude.”
Goldilocks zone fallers (down 40-60 per cent in two years)
Company | Total return (%) | Net debt ($mn) | Market cap ($mn) |
Lithium Americas (Argentina) Corp. | -60.3 | 102.9 | 813.0 |
Gem Diamonds | -61.8 | 22.0 | 16.1 |
Phoenix Copper | -65.7 | 1.4 | 16.1 |
Ascendant Resources Inc. | -63.0 | 22.8 | 9.2 |
GreenRoc Strategic Materials | -60.5 | #N/A | 3.3 |
Jubilee Metals Group | -63.1 | 9.4 | 136.3 |
Avalon Advanced Materials Inc. | -56.0 | #N/A | 31.6 |
Sabre Gold Mines Corp | -52.0 | 3.1 | 9.6 |
Anglesey Mining | -59.6 | 3.7 | 5.1 |
Arizona Metals Corp | -58.8 | -30.1 | 178.3 |
Star Diamond Corporation | -49.4 | -0.4 | 26.6 |
Caracal Gold | -57.7 | #N/A | 5.4 |
Karnalyte Resources Inc. | -54.7 | -2.3 | 6.4 |
Capital Metals | -55.4 | -2.4 | 7.1 |
Ferrexpo | -49.0 | -84.9 | 333.8 |
Firering Strategic Minerals | -45.8 | 0.3 | 7.2 |
SSR Mining Inc | -51.2 | -254.2 | 1800.7 |
Aterian | -55.5 | 0.2 | 5.7 |
Eurasia Mining | -54.7 | -1.2 | 61.6 |
STLLR Gold Inc. | -49.3 | -12.1 | 151.1 |
Kavango Resources | -51.3 | -3.0 | 14.8 |
Arkle Resources | -50.0 | -0.1 | 1.4 |
Power Metal Resources | -48.1 | #N/A | 15.7 |
Sherritt International Corporation | -50.6 | 215.8 | 79.5 |
Intrepid Potash, Inc. | -44.4 | 1.5 | 325.3 |
Generation Mining | -45.8 | -13.9 | 77.0 |
SolGold | -42.0 | 152.8 | 273.4 |
Wallbridge Mining | -44.0 | -29.8 | 81.3 |
Black Iron Inc. | -38.5 | -1.4 | 12.2 |
Titan Mining Corp. | -42.1 | 40.6 | 40.2 |
Strategic Minerals | -36.4 | 0.3 | 3.5 |
Keras Resources | -44.4 | -0.2 | 2.0 |
Fortune Minerals | -37.5 | 8.8 | 25.4 |
Lifezone Metals | -40.1 | -47.6 | 488.0 |
Source:FactSet |