Are miners not getting enough love from the market? That was the (rather self-serving) argument put forward by asset manager BlackRock recently. Global head of thematic and sector-based investing Evy Hambro cautions a lack of investor interest in the sector could starve it of the capital required to provide the materials necessary for the energy transition.

Whatever the source, this argument has real merit. There is a clear need for production of critical metals and materials to be ramped up if global targets around net zero and an accompanying move away from fossil fuels are to be met. That will require significant investment in new projects and developments.

CHINA COMPLICATES THE PICTURE

What has complicated the picture for the mining space in 2023, with the FTSE 350 Industrial Metals & Mining sector down by nearly 20% year-to-date, has been the disappointing recovery of the Chinese economy as it emerged from zero-Covid restrictions. Given the world’s second largest economy is, in turn, the largest consumer of several global commodities, it was always going to be difficult for shares in the miners to make headway.

On top of this there has been a shift from heavy emphasis on the energy transition towards energy security, largely as a response to the ongoing conflict in Ukraine. This has encouraged some back-pedaling on net zero, at least in terms of rhetoric, from energy companies and governments alike.

In a recent market commentary Baker Steel, the manager of mining-focused Baker Steel Resources Trust (BSRT) and a suite of other resources-related funds, observed: ‘An eventual change in the trend in interest rates could be the trigger for a return to a healthier market. However there remain concerns that the Chinese economy in particular has not bounced back post Covid lockdowns, and that their government is no longer capable of stimulating the economy in the face of a deteriorating housing market.

‘Against this, there remains the medium-term demand profile for many minerals to underpin the energy transition plus the growing interest by governments to secure supply chains for essential minerals. Attempting to call the exact timing on the potential recovery in the markets for both commodity prices and shares would
be unrealistic.’

AN OPPORTUNITY OPENS UP

In our view this has created a potential opportunity for investors prepared to look beyond the short term towards the longer-term potential. 

Berenberg analyst Richard Hatch comments: ‘We remain upbeat about the long-term dynamics of the sector, driven by rising demand to enable the energy transition.’

Exploring the valuation disconnect between miners and other parts of the electric vehicle and renewables space is instructive. For example, France’s Schneider Electric (SU:EPA) trades
on a price-to-earnings ratio of nearly 20 times.

Schneider is a world-leading electrical systems and automation and control firm with a focus on data centres, storage and other distributed energy resources and smart solutions that advance electrification, energy efficiency and renewability.

Some kind of disparity is warranted – Schneider makes extremely smart kit and resources companies dig a commoditised product out of the ground. But to trade on nearly double the 10.7 average PE for UK-listed diversified miners seems too substantial a gap.

At the other extreme, and at the end of the supply chain, EV maker Tesla (TSLA:NASDAQ) is on a PE of more than 60.

If this valuation disparity is to change, miners have to play their own part. They need to clean up their act in terms of environmental and social impact and working practices. This will require significant investment. FTSE 100 miner Rio Tinto (RIO) is an example of a business which is looking to up its game on this front.

CLEANING UP THEIR ACT

Rio certainly had work to do after blasting rock shelters in the remote Pilbara region to expand its iron ore mine in May 2020, in the process destroying one of the earliest known sites for Australia’s indigenous population.

This was followed by an external review published in 2022 which showed bullying and sexism were ‘systemic’ across the group, with 28.2% of women and 6.7% of men experiencing sexual harassment at work and 21 women reporting actual or attempted rape or sexual assault.

The survey of its workforce also showed people working in a different country to their birth experienced high rates of racism with 39.8% of men and 31.8% of women who identify as Aboriginal Torres Strait Islander in Australia experiencing racism.

Under chief executive Jacob Stausholm the company is on a journey to improve its ESG (environmental, social and governance) record. Initiatives include the successful pilot of an innovative, low-carbon iron-making process using iron ore from its Pilbara mining complex in Western Australia, known as BioIron, and the launch of a Building Safe and Respectful Workplaces pilot programme in collaboration with mining peers BHP (BHP) and Fortescue (FMG:ASX) and the Australian Minerals and Energy Skills Alliance.

Examples of funds, trusts, ETFs which offer diversified exposure to the mining sector include the aforementioned Baker Steel Resources Trust, BlackRock World Mining (BRWM), BlackRock Natural Resources D Acc (B6865B7) and Van Eck Global Mining (GIGB).

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