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Commodity price boom lifts Anglo’s earnings

RECM portfolio manager Jan van Niekerk reckons ‘we’ve got a couple of years left of high commodity prices ahead of us. SA platinum miners – and specifically some of the smaller platinum miners – still offer opportunities’.

FIFI PETERS: Following the record dividend declared by Anglo Platinum earlier this week, its mother company Anglo American has followed suite. The global miner has also declared a record dividend to shareholders, boosted by soaring profits. Let’s dig into the mining and the commodities complex at large with Jan van Niekerk, who’s a portfolio manager at RECM.

Jan, thanks so much for your time. Let’s hone in on the really strong profits that we have seen coming out of the mining sector recently – their being able to mine again as normal without restrictions from Covid-19. What’s been driving demand for all these minerals?

JAN VAN NIEKERK: Hi, Fifi, good evening. I think you have to take into account that the results we’re seeing at the moment are actually a culmination of a lot of things that have happened over many years. These results relate to activities and profits that were made in the previous financial year, and came on the back of many years of cost-cutting, financial and capital discipline, as well as pressure on labour that came before this, after the previous mining boom.

So what we are seeing now is that many South African mines have been able to mine or get their production up 10, 15, 20% perhaps, but they’ve been able to sell their production at much higher prices because prices internationally have gone up a lot. That’s why the profits are so high – it’s because their cost base hasn’t gone up in the same way.

FIFI PETERS: With the price outlook, given that mining has resumed to normality – perhaps not only in South Africa, but in most parts of the world and you’ve got all the supply now coming to market – what’s that expected to do from a pricing perspective?

JAN VAN NIEKERK: Fifi, remember when you talk to production coming to market, that is just regular mines returning to pre-Covid lockdown production levels. It’s not that easy to increase the production levels of any mine; it takes many years of investment and large capital expenditure, so the real increase in capacity takes years to expand. My suspicion is, if we still see the kinds of financial stimulus that the central banks in the world are putting into the system, and the constraint on supply, commodity prices could remain at these levels for quite some time. Mining cycles are notorious for being quite long and lengthy. So I suspect we’ve got a couple of years left of high commodity prices ahead of us.

FIFI PETERS: We’ve known that China is the world’s largest consumer of commodities, but where else are we seeing strong demand for some of these minerals?

JAN VAN NIEKERK: Remember that China is a big consumer of industrial commodities – iron ore, steel, coal and so on. What we are seeing is that there’s bigger and bigger demand for metals and commodities that are specifically related to electric vehicles. If you think about the fact that fellow South African Elon Musk has popularised electric vehicles, these vehicles use a lot of copper, for instance, as well as minerals that go into the battery pack.

So demand is coming from non-traditional sources; and what happens when commodity prices start rising investors also buy some of these commodities as a store of value, or to make a profit call – as speculators – which means that there’s another third source of demand which is people who will buy commodities to sell for a profit in future.

So higher prices pull in more interested parties who push the prices higher, which is pro-cyclical. And then, at the other end, when prices start falling you see reduced demand and the investors selling those. Then you overshoot on the other side.

FIFI PETERS: Given that you’ve described this favourable background that the mining industry is in, and you are expecting the good times to keep on rolling for a while, which stocks would you advise some of our listeners to be digging into at this stage?

JAN VAN NIEKERK: I think there’s a difference in the opportunity for the companies to make profit, which the market to a large extent has already anticipated. The share prices already reflect a lot of that. I do think the South African platinum miners – and specifically some of the smaller platinum miners – still offer opportunities. I would think of a company like Royal Bafokeng Platinum as an opportunity.

One would also be looking at parts of the market which are not favourites, which are coal miners, because the entire world is going green and coal mining companies are not in favour and they are priced cheaply – although the actual product that they’re selling is quite expensive at the moment. So something like  Thungela Resources would be another one I would look at.

FIFI PETERS: Which one wouldn’t you be looking at, at this stage?

JAN VAN NIEKERK: On  Thungela Resources, the company was recently spun off from Anglo American.

Read: Anglo’s coal spin-off Thungela debuts on JSE at R25

FIFI PETERS: I was asking on the flip side of that. Which mining stocks would you be shafting or shifting out of your portfolio at this stage?

JAN VAN NIEKERK: I think the bulk miners are the ones that you want to have a look at and stay away from. I think there’s a lot of good news in those already.

FIFI PETERS: All right, Jan. Thanks so much for that advice. That’s Jan van Niekerk who is a portfolio manager at RECM, just talking about the mining complex which has received a lot of attention of late. We have heard and seen all the profits that have come through and the profits that have helped to provide a cushion for South Africa’s economy, and Sars is definitely happy with the taxes that it’s receiving from the mining sector.

But the big question is: When does some of that money from the mining industry go into the real economy? I’m talking about new money, the new money that creates jobs, the new money that helps get the cylinders of the South African economy pumping again, and what is needed to get that new money in the real economy at a faster pace. I think that’s a question that does need to be answered another day.

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