The Finance Ghost: Why mining is a tough industry
This week, we saw several updates from the mining sector. This included some of the industry giants, as well as junior miners – companies that are much earlier in their journeys.
Before we go any further, it's useful context that Valterra Platinum (previously Anglo American Platinum) has enjoyed an increase of 44% in its share price over 12 months, while BHP is down 10% over the same period. Based on that, you would think that BHP is struggling in its operations, while Valterra is shooting the lights out, right?
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Mining isn't hard just because of how difficult it is to get the stuff out of the ground, both safely and efficiently. No, it's hard because even if you do that perfectly, your fortunes are primarily tied to global commodity prices for whatever commodity you happen to be extracting from Mother Nature. And if your operations hit a rough patch, those prices can save you (if you get lucky).
It's like training your heart out for a 400-metre race and then waiting to find out if someone has added a greyhound to the mix that day, with a result that is out of your control no matter how hard you try.
You see, BHP has just reported record production in both copper and iron ore for the year ended June 2025. Thanks to this excellent outcome, it also expects to hit its unit cost guidance across almost all its operations, as a period of efficient production is always great news for unit costs. But it hardly matters, as the average realised price for iron ore was down 19% for the period, while steelmaking coal fell 27% and energy coal was down 11%. Copper was the only positive story, with a 7% increase in the average realised price. Copper, much like Hansel all those years ago in Zoolander, is so hot right now.
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Alas, if the market had positive feelings about the trajectory for iron ore prices, then the BHP share price would've already started turning higher. Instead, there are worries about global demand in an environment of tariff uncertainty and substantial risks to global trade and consumption. The domestic Chinese market remains a serious headache as well. For a commodity such as iron ore to be doing well, the engine rooms of the global economy need to be in overdrive. Instead, they are spluttering.
Conversely, Valterra Platinum (and the rest of the PGM sector) is having a grand old time thanks to an upswing in PGM prices. Every dog has its day in the mining sector, with this dog now basking in the sunshine and being fed organic biltong from Woolies after a long night in the cold. If you look at the share price, you would never believe that Valterra released a trading statement this week that headline earnings per share (HEPS) will plummet by between 76% and 88% for the first half of the year. What on earth happened? And how is the share price still doing so well?
The main reason for this collapse in profitability is that there was flooding at the Tumela Mine at Amandelbult in February. Sure, there were some other issues as well (such as substantial once-off demerger costs related to the separation from Anglo American), but the bulk of the problem is thanks to factors way beyond management's control. If you exclude Amandelbult, then own-mine production was up 1%. That's little comfort when PGM sales volumes fell 25% thanks to this issue.
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We've now answered the first question about the reason for the drop in earnings, but what about the second one? Why is the share price still doing so well?
To begin with, 'so well' is a relative term. Over the same period that Valterra experienced a 44% upswing in the share price, Northam Platinum is up 72%, Impala Platinum is up 98% and Sibanye Stillwater is up more than 102%. So, in reality, Valterra is actually significantly underperforming the peer group.
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Then, it's important to keep in mind that PGM sector sentiment is generally positive at the moment. With Valterra promising the market that it can reach the lower end of full-year production guidance, there's a chance that it has a decent year overall – and the market is very willing to forgive tough periods at the moment. The demerger costs are also behind it, while recent cost saving initiatives should continue. These factors are supportive of a much stronger second half of the financial year, with the market inclined to believe in that outcome, thanks to strength in the PGM basket price.
We finish off with another rampant success story: AngloGold Ashanti. The share price is up 65% in the past year on the JSE, with the market continuing to back the yellow metal. The dollar gold price is up almost 40% in the past year, driven by worries about inflation and weakness in the dollar.
It's incredible to be able to write about a weaker dollar and stronger PGMs in the same piece – what year are we in anyway?
AngloGold certainly isn't looking this gift horse in the mouth. In fact, it is using the strength in gold to take advantage of opportunities to grow, with the latest example being the acquisition of Augusta Gold. This company is listed in Toronto, but the underlying assets are in the Beatty District in Nevada – and they just so happen to be alongside AngloGold's existing assets in that district. This is a regional consolidation play, with the market not even batting an eyelid at AngloGold paying a 37% premium to the 20-day Volume-Weighted Average Price of Augusta Gold.
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Gold looks easy right now, but it hasn't always been that way. PGMs are doing much better, but that comes after a terrible period. And although iron ore looks tough right now, BHP was trading at a vastly higher share price just a couple of years ago.
Mining is about cycles. And that's what makes it hard. DM
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