Mining Stocks Are Gaining From the War in Ukraine
Geopolitical turmoil has restricted supplies of some commodities at the same time that postpandemic economic growth is boosting demand. This perfect storm could lift the valuation of mining giants like Anglo American .
Russia’s invasion of Ukraine has caused commodities prices to leap more than 40%, with nickel’s rise exceeding as much as 100% in recent weeks. Anglo derives the bulk of its earnings from platinum group metals, or PGMs, which accounted for 34% of earnings before interest, taxes, depreciation, and amortization, or Ebitda, in 2021, followed by iron ore, copper, diamonds, and nickel. Anglo has no operations or offices in Russia or Ukraine.
Anglo (ticker: AAL.UK) shares are up 31%, to 39.39 pounds sterling, so far this year, surpassing Rio Tinto (RIO) but trailing Vale (VALE). Christopher LaFemina, an analyst at Jefferies, says Anglo’s stock could rise 16.1%, to £43, partly because commodities are likely to outperform even through a period of potential stagflation.
“Anglo shares may be in a holding pattern in the very near term, but the company is well positioned to benefit from what we expect to be a decadelong structural upturn in demand and prices for some of its key commodities (especially copper and nickel),” LaFemina says.
About 40% of the world’s palladium supply comes from Russia, and a possible tightening of supply for palladium, one of the PGMs used in the manufacture of autos, could help lift Anglo’s stock, says Jonathan Guy, an analyst at Berenberg.
Anglo has a market value of £64 billion. It fetches 8.3 times this year’s expected earnings and is valued in line with its peers. For 2021, the company posted underlying Ebitda of $20.6 billion, more than double the $9.8 billion from the prior year. Revenue for 2021 was $41.5 billion, up from $25.4 billion.
CEO Mark Cutifani, who divested Anglo’s thermal coal and other noncore assets to focus on platinum mining, told Barron’s in a statement, “The large majority of our output and investment capital is focused on metals and minerals” that are essential for decarbonizing global energy and transport systems.
Cutifani, who is stepping down in April after nine years, said the company will enhance its competitive position through organic growth of 35% over the next decade, starting with the new Quellaveco copper mine in Peru, which is set to start up later this year.
That demand will depend on continued economic growth, more infrastructure projects, and how inflation affects consumer spending. This means earnings and valuations will be largely dependent on the macro landscape.
Tyler Broda of RBC Capital Markets, rates the stock Outperform with a £42 price target. “Anglo American stands to benefit commodity-wise on most fronts,” he wrote, explaining that it is set apart because of its exposure to PGMs and diamonds.
Both commodities have supply constraints because of sanctions, but since Anglo’s mines are not in Russia or Ukraine, it benefits from unaffected supply and rising prices.
Anglo owns 85% of De Beers Group, the world’s leading diamond company. The diamonds business has contributed to annual Ebitda of $1.1 billion, according to Anglo’s annual report. The U.S. is Anglo’s biggest market for diamond sales, where it sells 51% of its stock, with China the second biggest at 13%.
Much of Anglo’s gains will depend on the economic recovery in China, which is where Anglo sees its largest annual revenue at 25.4%, according to FactSet. With fresh Covid outbreaks shutting down large parts of the country, the macro drivers are not all positive.