The Finance Ghost: Mining — what went up has come down

The Finance Ghost: Mining — what went up has come down
(Photo by Gallo Images / Sharon Seretlo)

The Anglo American Platinum share price has shed 36% of its value in 2022. It is now trading at similar levels to mid-2020 when the pandemic was raging. The share price of Kumba Iron Ore, another Anglo company, has also lost 36% of its value in the past 12 months.

The mining industry has a widowmaker reputation that has certainly been earned. Just as things start to look exciting, they often crash down to Earth. The right time to buy mining stocks is usually when nobody else wants them. The right time to get rid of them is when people start adding them to long-term portfolios.

The Anglo American Platinum share price has shed 36% of its value in 2022. It is now trading at similar levels to mid-2020 when the pandemic was raging.

A trading statement for the six months to June 2022 reminds us why this has happened. The platinum group metals (PGM) basket price fell by 14% vs the record prices achieved in the prior period.

Sales volumes are down 20% because the prior period enjoyed unusually high work-in-progress stock at the start of the period. The combined impact is ugly, with headline earnings per share (HEPS) down between 40% and 50%.

We then move on to Kumba Iron Ore, another Anglo company. The share price is flat in 2022, though it has lost 36% of its value in the past 12 months. Kumba produces premium iron ore and enjoys a price well above the benchmark price (15% higher in the six months ended June).

Still, an overall drop in free on board (FOB) export iron ore prices in the wake of global financial pressure and recessionary fears has led to a drop of between 48% and 53% in HEPS for the six-month period.

Anglo American offers a smoother earnings profile than the underlying portfolio companies because it is exposed to a wider basket of commodities. 

The star of the show is De Beers, as diamond prices have been substantially higher and diamond production has increased by 10% in the six months to June 2022.

Almost every commodity suffered lower production year-on-year in the latest quarter. The share price is down 17.8% this year and just more than 10% for the past 12 months.

Before you wonder why everyone was excited about commodities in the past year, it’s worth highlighting that these share price drops are mitigated to some extent by high dividends. 

For example, Anglo American Platinum paid R300 in dividends for the FY21 year and the current share price is just more than R1,15. Still, many are sitting with a negative total return.

As a final note on this topic, ArcelorMittal South Africa released a trading statement for the six months ended June that notes an increase of between 17% and 26% in HEPS. 

The steel industry is exposed to a global slowdown in demand, so ArcelorMittal is doing everything in its power to achieve efficient production results. The share price is down 27% this year and trades at one of the lowest price/earnings multiples you’ll ever see: just over 1x!

Action in telecoms

As we now know, MTN is looking to make a play for Telkom. The latter’s board has been beefed up with some impressive director appointments, including Brian Kennedy (ex-Nedbank CIB managing executive) and Mteto Nyati (ex-Altron CEO). This is certainly one to keep an eye on.

While MTN and Telkom bounce around the room like a Jack Russell chasing a toddler, Vodacom sits quietly in the corner and just gets on with it.

In the quarter ended June 2022, revenue increased by a steady 5.2% and international service revenue sparkled with growth of 10.4%.

Strategically, the company has established a “TowerCo” internally, which suggests that it may go down a road of spinning out the towers business to improve return on capital for shareholders. We’ve seen other telecoms businesses follow this strategy.

There are some big deals currently waiting for regulatory approval, including the acquisition of 55% of Vodafone Egypt and a 30% stake in CIVH’s fibre assets.

Vodacom has been the best place to put your money this year in the sector, up around 4%. MTN is down more than 17.6% and Telkom has lost 26%. Extend the chart to 12 months and MTN is the star, up 35% vs just 8% at Vodacom. One thing is consistent across the charts: Telkom hurts investors.

Banks are still having fun

Despite the economic worries, banks are enjoying an environment of higher interest rates and demand for credit as inflation creates larger balance sheets for both corporates and individual borrowers. Simply, assets that cost more to acquire also require more debt to finance them.

In a trading statement for the six months ended June, Nedbank confirmed that its HEPS will be between 23% and 28% higher. The green bank is firmly in the green this year, up 21% and well ahead of its peers in 2022.

A longer-term chart tells a different story, in yet another reminder of how important market timing is when picking stocks. DM/BM

After years in investment banking by The Finance Ghost, his mother’s dire predictions came true: he became a ghost.

This story first appeared in our weekly DM168 newspaper, which is available countrywide for R25.


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