Meyer on Mining: shares to follow in Q4 2020

Get up to speed with what’s going on in the mining sector as we talk to John Meyer, mining analyst at SP Angel. We discuss star stocks, small-cap gold shares, best-performing metals, mining heavyweights and tips for the fourth quarter.

Lee Wild, head of equity strategy, interactive investor:

Hello. I’m joined today by John Meyer, mining analyst at broker SP Angel who's going to bring us up to speed with what's happening in the mining sector. Now, John, the mining sector quickly regained losses suffered during the initial pandemic sell-off in March, but looks to have plateaued. What's the state of the mining industry currently?

John Meyer, mining analyst at SP Angel:

The mining industry is having quite a good time at the moment. Metal prices have recovered very well since the lockdown. We've seen quite a lot of stimulus money pledged, and although the Chinese have been very quick at getting into getting projects up and running, Western nations are not quite so good. So, we're now starting to see new projects in the West coming forwards in terms of, for example, the UK government announcing the massive 3.6 gigawatt Dogger Bank offshore wind farm, and Boris Johnson today saying that every house in the UK is going to get its energy from wind power.

So, there's a lot of construction activity involved with all of this. They have to make the legs for the windmills, they have to have the turbines, the generators, the blades, and then of course they have to have the machinery to plant these massive windmills onto these offshore sandbanks.  So, there’s a lot that’s in place. They have to then be cabled up, so there’s a huge amount of copper, steel, nickel, neodymium, pyridinium, other rarer metals, things like that, that are used in these windmills, so there’s just a lot happening.

Lee: 

Which stocks have done best in the past few months? Is there a niche that's done better than the rest?

John:

Well, the gold sector has been the strongest performer because gold prices have risen so much. Prices have settled back a little bit since the very dramatic rise, but there's still a lot of ongoing activity in the gold sector and it still looks as if it’s probably posed for another major run, particularly if the United States announce more stimulus programmes.

And whilst that tipped back a little bit when Donald Trump said that he wasn’t going to have any further negotiations on that with the Republicans, I think we’re quite likely to see that happen again, and in the meantime, copper and other industrial metals continue to push forwards. So, yes, there’s a lot of activity in gold because the margins now are so high. Most gold producers are making about a thousand dollars an ounce of operating profit, if not full, below the line pre-tax profit anyway.

So that’s a very good space to be in at the moment, and goldmining companies are by no means fully valued at the moment. But I think if investors are a little bit more braver and looking for more risk, I think probably worth looking at the industrial minerals at the rarer – at the copper producers. Because we've got this massive revolution going on at the moment with people ditching diesel and going for electric vehicles, and I think that the momentum's there, that’s something that's really gaining pace.

People who are looking at buying new cars now are saying, “well I don’t want to buy a combustion engine, I want to buy an electric vehicle,” and so there’s going to be an enormous amount of new material used within the battery packs, with the permanent magnets, and all the other bits and pieces that go into battery powered electric vehicles and hybrids.

Lee:

Now, John, we’ve talked previously about $2,000 gold, and it got there. Now gold’s currently trading at around $1,900 an ounce, what's the outlook for the rest of 2020 and into 2021?

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John:

The outlook for gold looks quite good because I don't think anyone's going to take stimulus away from the market, but I do think that there is a little bit more stimulus still to come, particularly in the United States and probably in Europe where I think the European Parliament is likely to push forward some more stimulus packages. And the ECB (European Central Bank), which is a pretty cautious organisation, is also likely to want to drive a bit more stimulus going forward so in order to pull the Eurozone out of the economic malaise that it’s in.

Because it’s not just in trouble because of the lockdown and the coronavirus, but it was in trouble anyway because Germany was having to retool a lot of its manufacturing businesses away from diesel and towards electric vehicles, and now we’re seeing a lot of that happening. So many, many production lines in the automotive sector getting ready to completely change the way they work.

Lee:  

Would you be buying gold stocks at current prices?

John:

Look, I think gold stocks are still very much undervalued. I think there’s a lot to come. And these companies are, in some respects, coming out of hibernation where they’ve been very unloved by investors for some years. And what they're now seeing is that they got a bit more cash, they can push forward on expansion plans, on new projects to reduce costs.  So, for example, Caledonia Mining (LSE:CMCL) in Zimbabwe are building a new solar farm to provide electricity for themselves, and presumably for the workers that work there.

And that'll make things more reliable, it will give them more security of power supply, so lots of little projects like that can get done in this sort of environment where there's just a bit more cash around from an investment perspective. And, of course, if you look at Caledonia, they pay a regular dividend as well, so investors get rewarded for holding the stock too.

Lee:

Now, John, are there any small cap gold miners that you like, particularly?

John:

We love Anglo Asian Mining (LSE:AAZ) and Azerbaijan, it's a good place to be. And we know there's a conflict going on to the North at the moment between Azerbaijan and Armenia, but that conflict's been running for many years and it flares up once in a while, but it's quite a long way away from where Anglo Asian are actually mining. In fact, I've been into that conflict zone in the past, and, yeah, it’s a fair distance, so I don’t think investors need to worry about that.  And of course, that issue has knocked the shares back, so that creates an opportunity for new investors to come in.

Condor Gold (LSE:CNR) we particularly like in Nicaragua. They need to develop and finish the development plans for the mine there, but I think that’s another exciting opportunity from a gold investment perspective.  If we look at SolGold (LSE:SOLG), a much bigger company, they’ve published recently more information on their exploration in Ecuador. So whilst they’re pushing ahead, working towards the feasibility study of the Alpala project, which is a multi-billion dollar block caving, copper, gold mining project, but as they do that, I think they have a very good chance of discovering something probably better than their initial project in their other exploration ground.

Lee:  

OK. What about the mining heavyweights though? Which ones look the most promising investment right now? And also, what's the outlook for dividends?

John:

Look, I'm still a big fan of Rio Tinto (LSE:RIO) and BHP (LSE:BHP) because of the huge cashflow coming off iron ore businesses. Iron ore prices are still very close to record high levels. The Chinese are still buying everything that these guys produce. And there’s problems in Brazil with Vale (NYSE:VALE) and other producers around the world, and we know that the Chinese stimulus programme is causing steel producers in China to continue to ramp up and utilise almost all their unused capacity.

So, it's a very strong market for steel in China. It should be a very strong market for steel related alloys like vanadium, and niobium, and manganese, and so we do expect these other industrial minerals to pick up as time goes on because they have to be put into the mix to create structural steels for this raft of new stimulus projects that the Chinese are working on. And as I've said, the Chinese are quicker at getting these things up and running because they've had so many projects ready to go.

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