Interactive Investor

Mining sector hit hard again

21st April 2022 13:19

Graeme Evans from interactive investor

After a great first quarter of 2022, the FTSE 350 industrial metals index has lost 8% in two days. Our City expert explains what's causing the latest sell-off and what the analysts think.

Mining sector valuations were today derailed as rising industry costs and lacklustre production figures added to jitters over the outlook for commodity prices.

The heavy selling focused on Anglo American (LSE:AAL) and Antofagasta (LSE:ANTO) after their first quarter trading updates, but BHP Group Ltd (LSE:BHP), Rio Tinto (LSE:RIO) and Glencore (LSE:GLEN) were also lower in a poor week for industry shares.

China’s Covid lockdowns and the impact of rising interest rates mean many commodity prices are off their recent highs, raising investor fears that the industry cycle is near its peak.

Anglo American shares have been among the biggest beneficiaries of rising industry prices, but the stock fell 347.5p to 3,688p today after it raised its full-year cost guidance by 9%.

This reflected a 4% impact from stronger producer currencies and 3% from inflationary pressures including diesel.

Copper miner Antofagasta (LSE:ANTO) is also seeing higher input prices, particularly for diesel and sulphuric acid, but said this was largely offset by the weaker Chilean peso.

BHP, meanwhile, is working to mitigate overhead  pressures through operational reliability and cost discipline. However, it wanted that skills shortages and overall labour market tightness in Australia and Chile were expected to continue in the period ahead.

Production down

The tightening margin guidance from three of the industry’s heavyweight stocks compounded a series of lacklustre production updates. Anglo American reported that production in its traditionally slower first quarter was 10% lower than a year ago, reflecting Covid-related absenteeism and high rainfall affecting operations in South Africa and Brazil.

Its copper production fell 13% and iron ore by 19%, prompting downward revisions to its full-year guidance. Conditions were more favourable for rough diamonds as output increased by 25% in the quarter.

Antofagasta shares dropped 136p to 1,500p as the copper miner revealed that production was 24.2% lower than in the same quarter in 2021 and 22.4% lower than the previous quarter.

This was in line with expectations and reflects the continued impact of the 12-year drought affecting its flagship Los Pelambres mine. A desalination plant is due to be completed in the second half but a recent review of the company’s wider expansion project at the site has revealed sharply higher costs.

The increase reflects the impact of Covid on the construction schedule and a $170 million hit from higher input prices, wages, labour incentives and logistics costs.

Covid challenges have also affected BHP, which today reduced its full-year nickel production guidance because of labour constraints. Lowered production guidance for its Escondida mine will also hit its copper performance, but forecasts for iron ore, metallurgical coal and energy coal are unchanged.

Chief executive Mike Henry added: “Market volatility and inflationary pressures have increased further as a result of the Russian invasion of Ukraine. We continue our work to mitigate cost pressures through a sharp focus on operational reliability and cost discipline.”

BHP shares, which are no longer listed in the FTSE 100 index, fell 56p to 2,833p but remain 27% higher over the year to date. Rio Tinto, which yesterday reported a 6% fall in first quarter iron ore production following a rise in Covid cases in Western Australia, dropped another 107p to 5,742p after a series of broker downgrades.

Berenberg removed its “buy” recommendation and lowered its price target to 6,500p, while JPMorgan valued the shares at 5,730p and RBC at 5,500p.

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