Miners selling into China are operating a few weeks or even months ahead of Europe and North America as the Middle Kingdom tries to get its industry back on track following the Covid-19 outbreak. Of the FTSE 350 miners, only Glencore (GLEN) has flagged a cut in its dividend while the cost-cutting and debt reduction in the sector since the downturn in 2015-16 sees other majors looking fighting fit despite prices falling for most commodities bar gold.
The realities of steelmaking – difficult and expensive shut downs – mean iron ore has kept its head up for the time being. Iron ore coasted along at around $90 (£73) a tonne (t) through most of March and only dropped to $80/t at the end of the month.
Liberum analyst Ben Davis said the major diversified miners' shares had been hit by investors pricing in a collapse in iron ore that hadn’t happened, although he forecast a drop in the coming weeks. "We still expect iron ore in the $50s by the end of the first half as scrap steel collection and domestic mine supply returns in China and rest-of-world seaborne demand collapses, but in the short term the Chinese spot market still appears relatively tight,” he said.
Copper has been in a sorrier state since January, settling around $4,700/t, or $2.13 per pound (lb) once the major sell-off happened on 9 March. BMO forecasts a slight improvement on this for the 2020 average price – at $2.33/lb – but this still leaves Antofagasta (ANTO) and Kaz Minerals (KAZ) looking at much lower returns than expected when the year started, despite their low costs.
Copper also provides a significant chunk of earnings for Rio Tinto (RIO) and BHP (BHP), who co-own the Escondida mine in Chile, and Anglo American (AAL) and Glencore, who co-own the Collahuasi mine in the same country. Chile has not yet shut operations like its northern neighbour Peru, but this certainly remains on the table, with state miner Codelco reporting cases at its operations. In any case, consultancy Wood Mackenzie said it was unlikely these cuts would be large enough to boost the copper price.
The debt reduction and asset sales seen in the FTSE 350 miners in recent years have left them in a relatively strong position to deal with a major fall in prices. They get the added boosts of a strong US dollar and weak local currencies like the Chilean peso and Australian dollar and the low oil price cutting costs. We have buy ratings on Anglo American, Kaz, and Antofagasta and hold ratings on BHP, Rio Tinto and Glencore.
See below for our entire FTSE350 review:
FTSE350 profitability: the direction is clear but not the severity
FTSE350 Review: Coronavirus and the dividend dilemma
FTSE350 groups scramble for cash
Aerospace on the descent as defence stays on course
Construction hits the brakes once again
Coronavirus threatens electronics and technology
Engineering and industrials braced for a downturn
Few guarantees for financial services
Coronavirus slams high street doors shut
Insurers stuck between policies and politics
Miners hold on to their hats in Covid rout
Supermarkets thrive but coronavirus harms other personal goods
Oil companies suffer Covid-19 crunch
Pharma giants entering the testing fray
Property income prospects dimmed by Covid-19
Subscription-based models make for sturdy businesses
Downturn threat obscures outlook for outsourcers
Are telcos still a defensive play?
