Miners feel the heat after latest production update

Mining sector valuations are suffering due to China property fears and global headwinds. What did Anglo American have to say about the outlook?

Mining stocks weighed on the FTSE 100 index today after Anglo American (LSE:AAL) revealed that the effects of continued “dislocations” in the global economy will influence its 2023 planning.

The comments from chief executive Duncan Wanblad were made alongside the mining giant’s third-quarter production report, which revealed 6% declines in copper and platinum group metals alongside a 5% fall in iron ore. Overall, output was flat after the ramp up of steelmaking coal production and 4% growth in De Beers rough diamonds.

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Anglo’s shares were 129p lower at 2,643.5p as the sector’s reporting season fails to shift sentiment since this summer’s de-rating wiped as much as 25% from valuations.

Rio Tinto (LSE:RIO) shares fell today 184.6p to 4658p and Glencore (LSE:GLEN) lost 15.4p to 500p during an otherwise positive session for the FTSE 100.

The lacklustre share performances reflect the struggle of investors to balance current cyclical headwinds with a longer-term growth story that’s fuelled by the increased metals intensity associated with decarbonisation.

A note this month from Bank of America said the sector was a “buy and hold” trade for longer-term investors with the ability to "take" a potential 10-20% drawdown.

It added: “Our forecasts continue to have a bearish tilt near term as world ex-China slows on high energy prices and higher rates. We see increased volatility as the market weighs low inventory levels versus (very) challenging macro headwinds near term.”

The bank has a “buy” recommendation and 7,000p target price on Rio Tinto as the cheapest of London’s big four miners, with a neutral stance on the others. Glencore was given a new lower price target of 520p and Anglo American is at 2,800p.

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This was before China’s 20th Congress, where Xi Jinping’s choice of loyalists for leadership roles was taken as a sign that ideology is being prioritised over growth-focused policies.

The country, which accounts for about 50% of demand for most metals and mined products, said this week that third-quarter GDP improved by a bigger-than-expected 3.9%.

However, this masks continued uncertainty over the outlook in the property sector. Broker Liberum said yesterday: “Real estate has yet to show any signs of inflection, and is unlikely to do so until house prices somehow stabilise.

“Infrastructure continues to be the bright spot, particularly in utilities. But how far can local government stretch the balance sheet to support this sector, given falling land sales.”

Outside China, the Federal Reserve is focused on driving down inflation and high energy prices are expected to keep European consumers and industries under pressure.

In today’s update, Anglo American revealed that the average price for copper was 13% lower in the third quarter compared with a year earlier. Iron ore was down 35% and platinum by 16%, offset by a 43% rise for nickel and doubling in the price for steelmaking coal.

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The company has benefited from higher prices through the ramping up of its operations in Australian coal mining, but has also seen lower copper ore grades in Chile and some operational challenges at its Kumba iron ore business. 

Overall, Anglo said it had the operational momentum to deliver on its full-year guidance as it benefits from the ramp up of a new “world-class” copper mine in Peru.

Wanblad said: “The continued safe ramp-up of our steelmaking coal operations, as well as further performance improvements at our iron ore businesses, are priorities to set the platform for delivery into next year.

“We do continue to feel the effects of dislocations in the global economy on our business - in energy and across supply chains and labour markets - and are planning accordingly for 2023, confident in the strategic position of our business.”