Time to Dig for Mining Stocks?
Mining stocks have come into focus of late because of the war in Ukraine and sanctions on Russia that are limiting the normal flow of minerals around the world. That’s particularly true because Russia is a big exporter.
But mining is generally not considered to be a high-growth sector. In fact, it is a major pollutant, which is why governments across the world are taking policy decisions to curtail output, or at least setting and implementing sustainability goals.
The main issue with mining is the amount of energy (mainly fossil fuels) it uses, which has a huge environmental impact. This is made worse by the fact that good deposits with significant ore availability are getting harder to find. When the ore is not available in sufficient quantities, miners require even more energy to extract it.
The growing costs of mining, when coupled with the high cost of equipment, often makes the extraction of such ores unviable. Only things like precious metals and rare earths may be worth extracting because they fetch a very high price and are therefore able to absorb higher costs.
Precious metals like gold, silver and platinum are often treated as a safe haven for investors in uncertain economic situations such as now. The Fed is focused on lowering inflation, which is being exacerbated by a number of factors including a still-hot housing market, supply chain disruptions, constraints in semiconductor supply, a very tight labor market and still-high amounts of cash that entered the economy via the Fed’s rescue plan for COVID 19.
This is being achieved through monetary policy, mainly interest rate increases. But there’s also the fear that a sharp response from the Fed could trigger a recession, and this is the main factor driving demand for precious metals right now. And as always, the increased demand from investors is pushing up prices.
As far as rare earths are concerned, they are essential for technological progress, including toward a greener future. Some of the latest technology uses these substances in significant quantities. But rare earths, as the name indicates, are hard to extract because they occur in traces. Moreover, they aren’t available at all in many places. So there’s a global drive (led by China) to secure the sources of these materials.
As in the case of rare earths, it is the earth itself that has the answers to many of our problems. And so, although coal is considered one of the dirtiest fossil fuels because of its polluting characteristic, this resource is playing a big role today in dealing with the energy crisis that has resulted from the Russia-Ukraine conflict.
So although many coal companies have cut back operations, they are doing very well in the current environment. Particularly because oil companies are not going out of the way to increase the number of drills, which is keeping supply constrained and prices attractive for all energy suppliers.
It’s also important to remember that mined materials are essentially raw materials that are converted to finished products for consumption. A general expansion in manufacturing activity is a positive indicator of demand since it means that more materials are being used.
One economic indicator of expansion in manufacturing is the Purchase Managers Index (PMI). Whenever the PMI reads above 50, there is expansion in the manufacturing sector while a reading below 50 indicates contraction. In a recession, there is usually a contraction in manufacturing.
The PMI is available on a monthly basis. And over the past year, it has remained well above 50. Its dip in January to around 55 may have caused some concern, but the number has jumped back since then. In March it was 58.8. This is an indication that manufacturing demand remains strong.
The above factors indicate that this is a good time to be investing in mining stocks. The Zacks Industry Rank of 46 allotted to the Mining – Miscellaneous industry out of 250+ such industries also places the industry in the top 18% of Zacks classified industries.