Best case for buying mining shares for 20 years

29th December 2021 16:31

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John Meyer, mining analyst at broker SP Angel, predicts which will be the dominant themes for the mining sector in 2022. He also talks volatility, the impact of ethical investing on the mining industry and why he expects gold miners to deliver ‘enormous’ value generation over the next year or two.

Lee Wild, Head of Equity Strategy, interactive investor: Hello. With me today I’m lucky to have John Meyer, mining analyst at broker, SP Angel. There’s a lot of big themes you’ve talked about that have run through all or – part, at least – of 2021, but what do you think the dominant themes for the mining sector in 2022 will be?

John Meyer, mining analyst at broker SP Angel: It’s going to be an interesting year – no doubt about that. The critical theme I still think is the electrification of our economies, or the further electrification. So really, this is about buying electric vehicles (EVs) and plugging them in. If you buy one of these beautiful cars, you need to be able to plug it in somewhere and there are claims that we have more parking stations per vehicle, or maybe per mile, than many other countries, but that’s still not enough. So there’s got to be a lot more development on the charging side of things. There’s going to have to be some beefing up of the grid infrastructure. There’s going to have to be an increase in the amount of power generation, not just in the UK, but just about every economy on the planet. There’s going to have to be just a lot more of everything when it comes to battery metals.

We’ve seen the price of lithium rise about five times over the last 18 months. We’re now up to – well, about $29,000 a tonne for lithium carbonate – that’s [bodumine] carbonate. So the prices are rising and they’re reflecting this enormous demand coming from the Gigafactories in China and elsewhere in the world. Almost every automotive manufacturer now has an enormous multibillion-dollar plan for developing new EV models. We saw Nissan come out this morning. I think they’re developing another 15 new electric vehicles, split between pure EVs and hybrids.

For me, hybrids are more of a temporary solution than a long-term solution, but of course, with the problems with charging infrastructure, I think hybrids will be acceptable for at least another 10 to 15 years. And that at some point battery technology will improve to a point where hybrids, I think, will become obsolete. Remember, with a hybrid, not only are you carrying a heavy battery, but you’re also carrying an engine and all the other bits and pieces that are required for that engine to drive the vehicle. So you’re doubling up on the weight of the vehicle in some respects, although, let’s not forget, electric vehicle batteries are very heavy.

And I think one of the things that’s going to continue to support the use of lithium in electric vehicle batteries is it’s an incredibly light metal. Most of the weight in the battery is in the nickel and the graphite within the mix. The lithium is actually probably the lightest component of the battery.

Lee: The FTSE 350 Mining Index hit a near 10-year high in March 2021, but by October was down around 29% from those levels. Do you expect further volatility like this in 2022? Or is it just par for the course for the mining sector?

John: Yes, there’s always a certain amount of volatility within the sector and it’s difficult to forecast what the key drivers of that are going to be. It’s difficult to forecast new variants of Covid. Other issues I think that are going to come out is, any companies that have been struggling with debt – like Evergrande in China – some of those issues are going to come out where the banks suddenly say, “Well, we’d actually quite like our money back now.” And I think there’s going to be more of that as the virus exposes more issues within the global economy.

That will create a bit more volatility. But within that, I still see that we’re going to get high prices for base metals, industrial metals, and the rare metals that are used within electric vehicles, within wind farms, within solar farms. Because solar uses a lot of tin and silver. And so it’s really a question of, well, which metals are going to suffer the biggest supply/demand deficits? And are any of those metals going to create such a large deficit situation that battery producers and electric vehicle manufacturers are forced to find other metals to go to?

Lee: John, one of the big stories of 2021 has been a much greater influence of environmental, social and governance issues on investing behaviour – ESG – among both professionals and retail investors. So what do you think the repercussions for the mining sector will be, and does this change the argument for investing in mining stocks?

John: I think the argument is still very good. In fact, I think this is the best argument for investing in the mining sector that we’ve seen in the last 20 years. And the sector had a good run from 2004 to 2006, 2007 and then got hit by the subprime crisis. So there’s always another crisis coming our way, but the current crisis in China is being dealt with by the Chinese authorities – relatively successfully, by the looks of things. Yes, there is a little bit of a slowdown in China going on and I think the Chinese authorities were quite happy to have a little bit of slowing there.

One of their big themes is going to be this dual circulation policy that they have, which is effectively a way of creating new consumption within China without overly-disrupting exports to the West. Because China earns an awful lot, it has a hugely positive balance of payments surplus as a result of huge exports into the West. But they recognise the need to actually start to transform and develop their internal economy to create a new generation of internal consumers. And President Xi’s property policies – which were partly to blame for the collapse of Evergrande – or shall we say the demise of Evergrande – is part of that policy, to be perfectly honest.

So it’s their form of levelling up, shall we say. So yes, there’s a lot going on and I think the big driver is really going to be electric vehicles, renewable energy, new power generation.

Lee: John, you didn’t have particularly high hopes for gold in 2021 and it has, indeed, failed to regain the heights we saw in 2020. Do you think we could see more activity in 2022?

John: Yes, I think it’s going to be a very, very busy sector in 2022. A lot of the companies that we’re working with are developing projects that are coming quite close to development. So those companies should move from being project explorers, project developers, into producers over the next year or two. And that’s very exciting time, because that will see – or should see – enormous value generation. Now, it’s quite difficult – well, it’s very difficult to take an exploration company and a project all the way through to production. But what is going to help is the fact that governments are so keen and determined to see these commodities produced, particularly in the lithium and the nickel spaces, where there is clearly a shortage right now.

Not just lithium and nickel, but tin, rare earths, and other commodities that are also controlled by China. Nobody wants to see China having too much power and too much sway over these commodities. We need to start producing these commodities in the West and we’re involved with companies that are talking to US State Department officials, funds that are acting for the US State Department, and being offered the finance to take these projects from grassroots, from developed exploration stages, all the way through to production, so that that metal will be available to companies like Tesla (NASDAQ:TSLA), Volkswagen (XETRA:VOW), Nissan and other manufacturers in the UK, Europe and the US.

Lee: OK. John Meyer at SP Angel, thanks very much for joining me today.

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