28-04-2025
Three nuggets from the mining sector
If you look beyond gold, you won't find much great news in the mining sector. Still, there are a few interesting things to learn from recent production updates.
If you could pick any nugget in the mining sector right now, you would certainly choose a gold nugget. The gold price is behaving like a meme stock, having broken through the $3,000/oz (R1,978 per gram) mark in March and then wasting no time at all in getting close to $3,500/oz (R2,307 per gram) in April. Now below $3,300/oz (R2,175 per gram), we are seeing the kind of volatility in the price that is usually reserved for property funds. Such is the broader environment that we currently find ourselves in.
This gold price boom has naturally driven huge returns in the share prices of local gold miners. In turn, these have boosted the JSE Top 40 Index returns. The performance of our local equity market this year has very little to do with conditions on the ground in South Africa.
If you look beyond gold, you won't find much great news in the mining sector. Still, if we look for nuggets of insights instead of just nuggets of gold, there are a few interesting things to learn from the recent production updates that we've seen in the sector, starting with the obsession with copper.
Copper on top
If you read the announcements by the likes of BHP and Anglo American, you'll see that they have copper on the brain. The metal is seen as being key to the energy transition, with numerous industrial uses and a particularly strong use case in electrification, which ties in perfectly with the global push towards reduced emissions.
This is a perfect example of how mining houses need to take a long-term view on a particular metal, as the investment required to get commodities out of the ground is immense. The difficulty of managing capital allocation decisions against a backdrop of commodity pricing cycles is a feature of the mining industry, not a bug.
You may recall that BHP recently made a play for Anglo American. What they were really after was the copper, as Anglo American is sitting on some strong copper assets. The rest of Anglo's group is a mixed bag of note, which is why the deal would have required plenty of restructuring at Anglo American to panelbeat their business into what BHP was actually looking for.
Although Anglo's board pushed back against the deal on that basis, the message from the market was clear: Anglo needed to sort out its group and focus on what was actually working. Ironically, the initiatives since then have been largely in line with what BHP would have required anyway. One has to wonder if BHP is simply waiting in the wings for Anglo to finish up its restructuring, before returning with another offer. Time will tell.
Anglo's greatest love may be copper, but they are also hanging on to their iron ore and manganese ore assets, as well as their future plans around the crop nutrients side of the business. Beyond that, it's all about asset disposals and demergers. Anglo American Platinum will be demerged at the end of May and will change its name to Valterra Platinum. Deals are in process to dispose of the steelmaking coal and nickel businesses as well, although a recent fire at one of the steelmaking coal assets has cast some doubt on that transaction.
As for De Beers, that brings us neatly to our third nugget…
Diamonds on the bottom
There's just no sign of improvement whatsoever for De Beers. This has become Anglo American's biggest headache, with diamond production down 11% year-on-year in the latest quarter. With prices down 38%, it's not like the lower supply is doing any wonders for demand. At this stage, lab-grown diamonds are looking less like a disruptive force and more like an extinction event for mined diamonds. If this is indeed an asteroid for the sector, then it's terrible news for the economy in Botswana.
Anglo American wants to sell De Beers, and they have a new long-term deal in place with the Botswana government to try to support such a transaction. I just can't see how they are going to find a buyer at a decent price, as there is no good news coming through in this business to support a thesis around growth, or even a recovery, for that matter.
Has Transnet finally bottomed?
Although Afrimat's full-year numbers paint a sobering picture in the iron ore industry, the Kumba Iron Ore announcement (which only deals with the latest quarter) shows that there are signs of improvement.
Kumba noted a 5% improvement in Transnet's performance, which in turn led to a 6% increase in sales volumes. The sad truth is that the infrastructure has been the bottleneck for the sector, as the iron ore miners have had to curtail their production to respond to what Transnet is actually capable of transporting.
Although there are some green shoots here, Kumba is taking a cautious approach. Instead of ramping up production this quarter, they instead used the opportunity to reduce their finished stock. Perhaps if Transnet can continue with this positive momentum, we will see a meaningful uptick in production.
The other good news for Kumba came in the form of the FOB (free on board) export price for iron ore. In the case of Kumba and its FOB export price for iron ore, it means:
Kumba's pricing is based on the cost of iron ore up to the point it is loaded on to the ship at the port.
The buyer (say, a steel mill in China) then covers shipping, insurance and any further transport.
Not only are they still running above the benchmark price, but they enjoyed a price that was 10% higher year-on-year.
For now, there's been no upgrade to guidance for the year. It's still early days, and we know how volatile the market is, not just in terms of iron ore pricing, but also in relation to Transnet's performance. Nonetheless, it's great to see some positive momentum here. As one of the key iron ore businesses in the broader Anglo American stable, Kumba helped to offset some of the pressures seen elsewhere in the Anglo group in this quarter. DM
