The Mining Sector's Biggest Enemy

Increasingly, environmental, social and governance concerns are affecting valuations in the mining industry.

- David McKay

Generally speaking, mining stocks trade at a discount to the market, even the powerful ones that rank highly on the JSE such as Anglo American, Glencore, BHP and South32. These are multinationals producing a range of minerals essential to daily civilisation from a variety of geographies. They ought to be doing better as an investment offering.

This was explored in a note by Bernstein, a New York-headquartered bank, which made the point that the sector operates in a market where demand growth has been continuous for the past 270 years. Moreover, the mining sector has no meaningful substitute to displace it; has incumbents that “enjoy a fundamental competitive advantage over any new entrants, holding completely nonreplicable industry position”, and doesn’t have any radical industry disruption on the horizon.

Mining stocks did, in fact, show a remarkable recovery last year after commodity prices staged a comeback following three or four years of reversion. But on almost any metric compared against the broader market, they continue to trade at a discount, be it “price-to-book” or “price-to-cash flow”.

Rising risks

Perhaps one of the factors that works specifically against mining company valuations is the increasing risk of environmental, social and governance issues, or ESG as it’s called. Mining is considered potentially harmful to both the health of, say, communities that live in its vicinity as well as humanity and the planet in general.