Mining on the Stock Market
Mining on the Stock Market
With over 150 mining companies listed on the LSE,
The
There are many ways of classifying the companies within the mining sector, but seeing as this is an investment article, we shall use the FTSE Industry Classification Benchmark (ICB). Mining is an industry sector in its own right - it sits alongside a number of other closely associated industry sectors, including Oil & Gas and Industrial Metals - which we will cover at a later date.
The ICB further divides the mining sector into five material-based sub-sectors:
|
Sub-sector |
Commodity |
Typical End Use |
|
Coal |
Thermal coal; metallurgical coal |
Power generation; steel processing |
|
Diamonds & Gemstones |
Diamonds; rubies; tanzanite; opal; etc |
Retail jewellery. Most industrial diamonds are synthetic |
|
General Mining |
Base metals - ferrous & non-ferrous; energy & industrial minerals |
Electrical connectors; wires; construction & machinery; air conditioning and refrigeration |
|
Gold Mining |
Gold-bearing ores |
Gold's pliability and conductivity lend it well to jewellery, electronics, dentistry - and investment |
|
Platinum & Precious Metals |
Platinum group metals (platinum, rhodium, palladium); silver; other precious metals |
As well as their use in jewellery and electronics, 'PGMs' are essential in the production of catalysts for engines |
Current Market Factors
The unprecedented demand for many metals and minerals in the current market is being driven by the expanding Chinese and Indian economies. Demand currently outstrips supply - right the way through from base metals to uranium - and commodity prices have surged to record levels.
· Asian demand. Copper is used in all forms of electrical conduction and prices have soared. Paladin, zinc and platinum have also hit multi-year highs. Silver is used in export products such as mobile phones - silver futures hit a 23-year high of $11.45 an ounce on the New York Mercantile Exchange NYMEX at the end of March.
· Supply uncertainty. Global copper and zinc stock levels are low. A lot of the current mining activity takes place in economically or politically unstable countries and any minor threat to the supply chain is impacting on prices. A strike at Grupo Mexico's copper mine and the closing of several mines in Indonesia (due to landslides and environmental concerns) helped push copper futures to a record $5,490 a tonne on the London Metal exchange (LME) on March 31.
· Economic uncertainty. Gold prices have surged as a result of investors buying bullion to hedge against a weak US Dollar and to guard against geo-political uncertainty. Gold futures hit $591.80 an ounce at the end of March, the highest closing price since 1981.
This last figure relates to international companies listing on stock markets outside their country of nationality.
· There have been over 32 non-UK listings on the LSE in Q1 2006, as against 11 non-US listings on the New York Stock Exchange.
· In 2005, more than £9 billion was raised by non-UK flotations on the LSE, versus a mere £2 billion raised by non-US flotations on the NYSE.
Two factors have accounted for this shift from
· The Sarbanes-Oxley Act of 2002 was introduced in the wake of the Enron scandal. Its strict reporting requirements were designed to protect the
· Second,
Mining companies from across the world have therefore chosen to list in
Of course, following the news that the NASDAQ has bought a 15% stake in the LSE, the dynamic between the markets may change in the future. As news changes daily, investors are advised to get the latest information before making any investment decisions.
The surging global demand and uncertain supply have caused record commodity prices and the mining shares have benefited accordingly - making this a very interesting sector for the private investor.
The Mining Sector Top Ten
There are around 150 mining companies on the LSE - 15 listed on the Main Market and the remainder on AIM. Most of these companies have widespread overseas operations - and very often they have primary or secondary overseas stock market listings as well.
|
Top 10 Mining Companies |
Industry Sub-Sector |
Market Cap £mil |
|
ANGLO AMERICAN |
General Mining |
32,024.41 |
|
|
General Mining |
30,459.05 |
|
BHP |
General Mining |
25,630.08 |
|
XSTRATA PLC |
General Mining |
9,958.79 |
|
KAZAKHMYS |
General Mining |
4,053.00 |
|
|
General Mining |
4,016.38 |
|
LONMIN |
Platinum & Precious Metals |
2,958.20 |
|
VEDANTA |
General Mining |
2,771.34 |
|
RANDGOLD |
Gold Mining |
1,114.67 |
|
KAZAKHGOLD |
Gold Mining |
698.40 |
Source: LSE 31/01/2006
Anglo-American is the largest of these behemoths. Listed in
Share prices have recently risen in reaction to plans to reduce its 51% holding in AngloGold
Rio Tinto and BHP Billiton shares both surged recently after signing contracts to sell uranium to
Vedanta, with operations concentrated in India, expects to benefit from India's continuing demand for base metals - and its new $2.1 billion aluminium smelter project in Jharsuguda, Orissa (news release: 01/03/06).
Kazakhmys specialises in copper mining in
Gold miners Randgold and Kazakhgold have both benefited from buoyant gold prices. Kazakhgold is a relative newcomer to the LSE, only listing in December 2005. As its name suggests, the Group's main activity is gold mining in
Consolidation in the Mining Sector
On top of rocketing commodity prices, the possibility of consolidation within the mining sector has further excited investors.
The Xstrata share price has moved up on the back of persistent rumours relating to a takeover bid for Canadian miner Falconbridge. Xstrata is a Swiss company and holds the distinction of operating the world's largest zinc smelter in
Lonmin, the world's third-largest primary platinum producer, saw its share price surge during February on news that it was in discussions with an unknown bidder (news releases: 17/02/06, 24/02/06). These talks foundered, but rumours of an offer persist.
Mining on AIM
Whilst the LSE Main Market holds the global giants of the mining world, AIM holds the smaller, more dynamic (and more volatile!) operators. There are over 140 miners listed on AIM, accounting for around 15% of this entire fledgling market. And they just keep on coming - there have been 9 more miners listed since March 1st alone!
AIM offers a more relaxed regulatory environment for companies to raise capital. The smaller mining companies fit the growth company profile that so many AIM investors look for - which explains why both the miners and the investors are drawn together on AIM.
The smaller mining companies on AIM can generate equally impressive and ruinous results:
· Shares in diamond exploration company African Diamonds rose by a phenomenal 74% in March on news that the valuation of its Botswana project - yet to start production - is likely to be revised upwards (news release 31/03/06).
· Tertiary Minerals saw their share price increase by 62.16% in response to news of an agreement with a Saudi consortium to conduct feasibility studies for a new tantalum-niobium project (a metal used in surgical instruments!) (news release: 31/03/06).
· On the other hand, River Diamonds dropped a painful 37% last month after announcing a loss of £1.4 million in 2005, caused by its failure to develop a project in Brazil (news release: 24/02/06).
