Integrating GS Competitive Positioning (CP), commodity preference and valuation
We sort our best ideas into three groups to reflect the cyclical nature of stock picking in the global mining sector:
1) Strong CP / Strong commodity exposure:
BHP Billiton, First Quantum, Lundin Mining, Boliden, Vedanta, Freeport, Southern Copper, Dominion Diamonds, Sandfire Resources.
2) Strong CP / Poor commodity:
Rio Tinto, Anglo American, FMG, Vale, Coal India, PT Tambang, PT Adaro, Yanzhou Coal, Shanxi Lu’an
and Atlas Iron.
3) Weaker CP / Strong commodity play:
Alcoa, Norilsk Nickel, Norsk Hydro, Rusal, Lonmin and Alrosa.
Details :
Investing in miners remains challenging
The mining sector has underperformed the wider market every year since 2011, and 2014 has also
been tough – with the SXPP down 6% ytd. We explore 4 themes driving the sector:
1) Changing China,
2) oversupply in key commodities,
3) cost reduction and productivity lowering cost curves and
4) higher taxes / royalties as commodity prices fall. These are all presenting challenges to returns for the miners; and although some observers have been calling for a bottoming in the global mining sector to occur this year, we believe
single stock selection has become more critical than a broad sector call.
CP important, but cyclical factors matter
The strength of a company’s Competitive Position has been a strong indicator of through-the-cycle performance, with Q1 names outperforming on a 3- and 5-year basis. However, cyclical factors of commodity preference and valuation, combined with CP, are vital to call shorter range stock performance.