Investing in Metals & Mining

 

Content supplied by Breakaway Research

The Metals & Mining sector contains the bulk of the resources sector and comprises the large diversified resource companies through to mid-tier producers and junior explorers. Global resource sector consolidation has occurred in recent years and has generally focused on the mid-tier producers.

A major attraction of the sector is its earnings and valuation leverage to changing commodity prices and the A$/US$ exchange rate. Major global funds generally invest in resource shares to participate in a strongly growing world economy where industrial demand is expected to lead to increasing commodity prices.

Other factors which influence share prices include:

Supply of Commodities - the other key determinant in metal and energy market balances (and hence pricing) is the primary and refined productive capacities. Whilst capacity is more easily quantified than demand, it is frequently subject to disruption, and is also influenced by secondary markets.

Resource Company Fundamentals - mines and oil fields are finite assets and the quality and duration of operations will largely determine the sustainable earnings potential of a company, and hence its market valuation. Short-term earnings and cash flow are driven by operational performance, as well as sensitivity to specific commodity prices and exchange rates.

Exploration Opportunities – significant value can be added or destroyed by companies during the exploration phase. Valuation of exploration assets can be complex and volatile. Timely and insightful interpretation of exploration results can add tremendous value for investors.

Resource company shares frequently display a higher level of volatility in comparison to industrial companies. With the higher level of volatility, investors need to identify the specific reasons behind a particular investment and its attached risk profile within the sector. Typical examples are:

  • A low risk investment in a major diversified resource company to participate in a general increase in commodity prices based on macro-economic fundamentals, incremental production growth and a modest dividend yield.
  • A medium risk investment for earnings leverage to expected commodity price increases in a base metal company with several operations producing a limited number of commodities.
  • A higher risk capital growth investment in a small company seeking to develop a new major project.
  • A higher risk investment in a junior exploration company which has reported several interesting nickel drill intersections in a promising new nickel project.

In higher risk investments, a portfolio investment approach is always recommended as exploration is an inherent high risk activity and resource project development often involves tackling a range of complex issues relating to the environment and native title as well as technical, funding and permitting aspects.

Two new real-time indices, the S&P/ASX300 Metals & Mining index and the S&P/ASX Gold Index, were launched on Monday 7 August 2006 by Standard and Poor’s. The indices have been developed after consultation with the market and are a joint initiative between ASX and Standard and Poor's.

The S&P/ASX300 Metals & Mining index (XMM) is based on the S&P/ASX 300 index and is comprised of companies that are classified as being in the Metals and Mining industry.  It includes producers of aluminium, gold, steel, precious metals and minerals and also diversified metals and minerals.  The new indices recognise the important position of the mining sector in the Australian equity market and enhance the profile of the Metals and Mining and Gold sectors within both the Australian and international markets.   

S&P/ASX Metals & Mining and Gold Indices Factsheet