40% Of The World’s Largest Mining Companies Are Now In Emerging Markets

The largest mining companies are gaining from the metal price recovery

The mid-2014 commodity price crash spelled bad news for most commodity miners. Over time, however, the markets have seen a recovery in most metals. The SPDR S&P Metals and Mining ETF (XME), which tracks the largest mining companies, is up over 150% since January 2016, which is about the time most metals touched their lowest price point. Trading at about $30 currently, it is still 25% below its 2014 (pre-crash) highs. So far this year, metals have been demonstrating a positive upward trend in price performance.

Emerging markets house about 40% of mining companies

We looked at the list of top mining companies of the world, and 40% of miners are based in either emerging markets (EEM) (VWO) or frontier markets (FM) (FRN). It is for this reason that many emerging markets are particularly sensitive to the price of metals. Brazil (EWZ), Russia (RSX), China (FXI), Mexico (EWW), India (EPI), and Chile (ECH) are prime examples in this regard. Some of the largest emerging market mining stocks by market capitalization, therefore, also herald from these countries.

Top 5 emerging market mining companies (by market cap)

  • Brazil’s Vale SA (VALE) is the world’s largest producer of iron ore and nickel.
  • Norilsk Nickel (NILSY), Russia is the world’s leading producer of nickel and palladium. It is also one of the biggest players in copper production.
  • Hindustan Zinc is the world’s second largest zinc producer.
  • Polyus (OGYPY), Russia is one of the world’s top 10 gold mining companies globally by output.
  • Fresnillo (FNLPF), Mexico is the world leader in silver production.

These are the largest mining companies originating from emerging markets. However, given the fact that many of these stocks have already seen sizable surges in value, they may not offer outsized growth going forward. For mining stocks offering attractive valuations, we filtered a list of 5 emerging market mining stocks with favorable valuations that could see sizable returns as the metal price trajectory continues to tread northward. These are highlighted in detail in Part 2.

Watch These Foreign Mining Stocks As Kazakhstan Cashes In On Metal Price Recovery

Increase in mining production

Kazakhstan is the world’s largest producer of uranium (URA). It stands second in chromium production (after South Africa (EZA)) and also boasts a high level of availability and mining of lead, zinc, copper, petroleum, and other minerals. Being a landlocked nation, the country also enjoys the advantage of exporting directly to its neighbors such as China (FXI) and certain European countries via Russia (RSX). Over the past few months, Kazakhstan’s mining sector has been going quite well.

Since October 2016, Kazakhstan has been recording positive growth in mining production (see chart above). Mining production increased by 14.4% in April 2017 as compared to April 2016.

Foreign investment into Kazakhstan’s mining sector

Foreign miners including the Anglo–Swiss multinational commodity trading and mining company Glencore (GLNCY), Russian gold producer Polymetal International plc (AUCOY), Luxembourg-based diversified natural resources producer Eurasian Resources Group, and Anglo-Australian resource company BHP Billiton (BBL) hold mining assets in Kazakhstan. Other large foreign mining companies that are active in Kazakhstan include Rio Tinto (RIO), Iluka Resources (ILKAY), Central Asia Metals Plc, Areva SA (ARVCY), ArcelorMittal (MT), Yildirim Group, Russian Copper Company and Rusal. A safer regulatory environment and good projects could help Kazakhstan attract more foreign capital into its mining sector (XME).

Recovery in metal prices

The recovery seen in metal and mineral prices over the last few months (see chart above) has contributed significantly to the economy of Kazakhstan. Kazakhstan’s mining companies, including Kazakhmys, KAZ Minerals (up 72% YTD as of July 19), Kazzinc (a Glencore subsidiary), Syrymbet JSC, ShalkiyaZinc, JSC AK Altynalmas, have benefitted from the same. Copper-focused KAZ Minerals reported a 43% growth in revenues in 2016 over the previous year. The depreciation in the Kazakhstani currency, the tenge, has also helped reduce the average operational cost for certain metal producers. The past two years have seen the tenge depreciate by around 45% against the US dollar.

Meanwhile, Kazakhstani petroleum producer JSC National Company KazMunayGas (up 28% YTD as of July 19), has benefitted from the oil price recovery.

As the mining industry continues to attract investments into Kazakhstan, China’s Belt & Road Initiative is another big factor contributing to increased investment into this Central Asian (AAXJ) (VPL) economy.

Mongolia Aims To Boost Activity Amongst Foreign Mining Giants With Relaxed Laws

Mining accounts for over 80% of Mongolian exports

The mining sector accounts for approximately 25% of Mongolia’s GDP and more than 80% of all exports. The resource-rich economy has had its double–digit growth glory days back when commodities (DBC) demand from China was robust. However, since the commodity price slide in mid-2014, the economy has been struggling to cross the 5% growth rate mark. Mongolia has been attempting to immune itself from such commodity shocks by diversifying into other export oriented industries such as meat, dairy, and cashmere. Regardless, nothing diminishes the importance of metals and mining (XME) (PICK) in generating revenue for the economy, and particularly funds coming from major mining giants operating in the country including such as Rio Tinto (RIO) or Xanadu Mines (XANAF).

2 reforms to attract more foreign investment

Although commodity prices are recovering, this will still not put the metals and mining industry in Mongolia back to where it was during the boom period. To plug the gap, local authorities are undertaking new reform measures to attract foreign investment into the area.

  • In May, the country decided to open up a wider mining exploration area, now covering over a fifth of its territory.
  • The country has also revoked a banking law that required foreign companies to channel all their sales revenues from investment projects through local banks.

Rio Tinto and others stand to benefit

Consequently, companies such as Rio Tinto (RIO) and Turquoise Hill (TRQ) have launched new exploration projects in the Asian (AAXJ) (VPL) nation for metals and mineral resources, beyond the pre-existing Oyu Tolgoi (OT) mine. OT is a copper-gold mine in the South Gobi region of Mongolia. Turquoise Hill (TRQ) currently holds a 66% stake in OT, with the other 34% being with the Government of Mongolia. Rio Tinto (RIO) indirectly owns a 50.8% interest in Turquoise Hill Resources.

In October, a new gold zone was discovered at the Bayan Khundii gold project in Mongolia by Canada’s Erdene Resource Development (ERDCF). The project, now Erdene’s flagship venture, has grown to prominence in the past 18 months.

Australia’s Xanadu Mines (XANAF) is another established explorer and metal miner in Mongolia. Its flagship Kharmagtai copper-gold exploration project has been delivering beyond initial expectations thus far.

The Coal Mongolia 2017 international conference and exhibition to be held from September 7-9 this year in the capital, Ulaanbaatar, is expected to help the economy attract international investment into the coal sector of Mongolia. Currently, Mongolian coal export capacity has reached about 50 million tonnes but actual export is around half of the full capacity.

3 Sectors To Buy In Mongolia If IMF Funding Succeeds In Boosting Diversification Beyond Mining

IMF funding to focus on 3 areas in Mongolia

The IMF has approved a three-year, $434 million loan for Mongolia as part of a broader $5.5 billion financing package. The bailout program focuses on:

  • Fiscal consolidation, which may require Mongolia to tighten monetary and fiscal policy
  • Recapitalization of financial institutions (read, Mongolia’s Banks Threaten Economic Crash)
  • Boosting the economy’s competitiveness and fostering diversification to create jobs and achieve more inclusive growth.

Currently, over 86% of Mongolian exports fall under minerals and metals (XME). While commodities do remain a backbone of the economy, the IMF sees Mongolia as also well positioned to develop its meat and dairy exports, as well as its already well-known cashmere sector.

Opportunity to diversify beyond mining

While Rio Tinto (RIO), Turquoise Hill (TRQ), Erdene Resource Development (ERDCF), and Xanadu Mines (XANAF) continue to generate revenues from their mining sector investments, consumer based companies may soon have a chance to account for a larger share of this Asian (AAXJ) (VPL) nation’s exports. With close to 60 million livestock and the IMF’s financial support, meat exporters such as Makhimpex JSC (MSE: MMX), Makh Market LLC, Mongol Eco Makh LLC, Green Grace Land LLC, Darkhan Meat Food LLC (HSH), and Khaan Khuns LLC, Aussie Meat Company, Erdmeat LLC, and Precom LLC may see brighter days ahead. China, Russia, and Vietnam currently count among the three biggest markets (in order) for Mongolian meat exports.

Within the dairy space, Suu JSC (MSE: SUU) also holds potential. The dairy processor, Mongolia’s first, is also a recipient of international funding from the IFC which is a part of the World Bank Group.

Mongolia is the second largest producer of cashmere after China (FXI), providing nearly 28% of the total global supply. From Mongolia’s cashmere sector, Gobi JSC (MSE: GOV) owns over 21%of the world’s cashmere processing capacity. 25.1% of the company trades on the Mongolian Stock Exchange. Tuul Cashmere (MSE: TUL), Buyan (BYN), Sun Shiro, are other notable cashmere producing corporations in Mongolia.

Why Peru and Colombia Have a Higher Spread of Profitability than Emerging Markets Globally

Higher profitability + idiosyncratic opportunities

Felipe Asenjo, regional head of equities at SURA Asset Management sees valuable investment opportunities in the Pacific Alliance countries of Mexico (EWW), Chile (ECH), Columbia (ICOL) and Peru (EPU). Asenjo expects companies in these regions to grow at 17% CAGR over the next 3 years. “The Pacific alliance has always had a higher spread of profitability than global emerging markets… the second region in the world in the last 15 years with the highest delivery of earnings growth,” said Asenjo.

Meanwhile, Diana Kiluta Amoa, senior portfolio manager on the local-currency team at JP Morgan (JPM) Asset Management sees idiosyncratic investment opportunities in Peru and Colombia.

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Peru

Private investment in Peru (EPU) is expected to bounce back and grow 0.5% in 2017 and gradually reach 6.5% growth by 2021, according to the Economy and Finance Ministry. The Ministry expects greater infrastructure investment due to the resumption of projects linked to Brazilian enterprises, to be the primary driver of such growth. The agency also expects increased mining activity to boost private investment. The Finance Ministry also forecasts public investment to rise by 15% in 2017 and in 2018.

The Peruvian economy has already shown its resilience towards the El Niño phenomenon (causing heavy rains and flooding), by slowing less than expected. Prudent actions taken by the central bank such as cutting interest rates should “boost activity” and put Peru on track towards an expected 3% overall economic growth, claims Prime Minister Fernando Zavala.

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Colombia

According to Santiago Angel, head of the Colombian Mining Association, enormous potential lies on offer in the mining industry (XME) in Colombia (ICOL), which serves as a major growth engine for the economy. Angel sees the industry bringing in a whopping $1.5 billion in 2017 and $1.7 billion in 2018, with a five-year investment of $7.5 billion; provided the government guarantees legal certainty to businesses. Coal (KOL), gold (GLD), and copper (COPX) remain the three main mining sectors in Colombia.

AngloGold (AU) and Eco Oro Minerals (GYSLF) are the larger players in Colombia’s gold sector. The biggest coal companies are Drummond, Glencore (GLNCY) (GLNCF), Murray Energy, Colombia Natural Resources, and Cerrejon, which is jointly owned by BHP Billiton (BHP), Anglo American Plc (AAUKF) and Glencore.