After a successful tip for 2019, mining analyst John Meyer tells our head of equity strategy Lee Wild which heavyweight miner he backs in 2020, plus his top junior miner and outlook for gold.
[Video filmed on 4th December 2019]
Lee Wild, head of equity strategy at interactive investor:
First of all, we should recap on what's happened already in 2019, the past 12 months. So, the FTSE 350 mining index, it's been a real rollercoaster year. Starting at around 16,500, the index rallied around 27-30% to 21,000. We haven't seen those levels since 2012. It slumped in the summer, we've had a bit of a rebound but, given Trump is having such a big influence on the markets right now, what do you think investors should expect in the coming year, further volatility through 2020?
John Meyer, mining analyst at SP Angel:
Well, Trump has definitively added volatility to financial markets, mainly in the large cap end of things to be honest, and surprisingly so perhaps. It has created a risk-off atmosphere within the marketplace; small caps have done less well as a result. And when we saw that, when there was the opportunity for Trump to perhaps sign a trade deal, they lifted well, but they came crashing back as soon as the prospects for that trade deal fell away.
So, we do have an interesting market situation at the moment, offering lots of potential, but really the market is, shall we say, stalled pending Trump's signature on a trade deal of some sort. And maybe that won't happen for a while.
Last year was definitely one to own the large cap miners. They outperformed the FTSE 100 significantly over the year. I'll remind you, you picked Rio Tinto (LSE:RIO) as a “safe and boring” stock for 2019. Now, I tell you the shares are up 12% year-to-date (2019) and returned as much as 35% at their peak. The dividend yield of 6% is something for income seekers too.
So, I think viewers are going to want to know what your large cap stock pick is for 2020!
When we look around the large cap market, we are faced with Rio Tinto, BHP Billiton (LSE:BHP), Anglo American (LSE:AAL) or Glencore (LSE:GLEN), and they're all slightly different. The difference between Rio and BHP is not huge, they're both into iron ore, they both do a lot of copper. But for us, I think Rio still has the edge and it's in a safe set of jurisdictions.
I like Glencore as a company, but it operates in some quite risky areas, and some of that risk has been proven. And although they have fantastic production discipline, that also can work against them in a declining market. So that rules that out.
Anglo American (LSE:AAL), also it's a little bit of a second-tier major stock in our view at the moment, it has the potential to get better, but it isn't there at the moment. So, we're still going with Rio Tinto, it still has a very good mix of iron ore and copper, which drive huge revenue growth and huge earnings.
So, I think the dividend is pretty secure there. But it also has its industrial minerals department, so there are other bits and pieces within the portfolio. You don't really notice them so much in the earnings at the moment, but they have the potential to grow quite a lot going forward, so we're still in there with Rio Tinto.
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And on the small caps John, which junior mining stock would you put in your portfolio for 2020?
Well, if I'm allowed to put three stocks into the portfolio, there's Arc Minerals (LSE:ARCM), because it has a great copper discovery in Zambia, and we're still assessing it to see how big it's going to get, but drilling out today says that very good grades, great intersection widths, and we're looking for this to be at least several million tons of copper ore, grading something towards 1% copper.
Now, that's a small mine as it stands right now, but it's still open in the various dimensions, and I think there's still a potential for this to become a relatively big copper discovery and something that the majors will take an interest in.
And I'm sure they are, I'm sure the geologists of Rio Tinto and First Quantum Minerals (TSE:FM) and a few of these other companies, are actually looking at this very closely, because I think this is, the grades are so high, that this is something they have to look at.
If I look at another stock, Bushveld Minerals (LSE:BMN), a very exciting larger company, about £300 million market cap. Good cash flow generation, it's producing vanadium in South Africa, produces about 4 or 5% of the world's vanadium right now.
And although that's a relatively small market, it's very important, because vanadium is the alloy that hardens steel. So if there's going to be a lot of new infrastructure development, HS2, Crossrail 3, more vanadium will be required for that, but not only for that, with all the new renewable energy resources that we've got - the new windmills and solar farms - that needs battery backup, otherwise what happens is the lights go out when the wind doesn't blow and the sun doesn't shine.
So, we need vanadium redox batteries to provide that grid support. And they use a lot of vanadium. In fact, when I say a lot, they use a lot of valuable vanadium. And what can happen is the market can run short quite easily, so I suspect what will happen is orders will be placed, these vanadium batteries will be built and put into the grid systems, which is brilliant for us, from a consumer perspective.
And I think the price will go better. And more to the point, Bushveld Minerals, as a relatively large primary producer, will be able to produce more and sell more vanadium at ever high margins, and that's what we're looking for.
My third pick for my portfolio for the year is Bluejay Mining (LSE:JAY), they have ilmenite, which is a titanium project in Greenland. And it's in a nice location, although it's high up in the Arctic Circle, it's right on the coast, it's right on a deep water field in effect, very easy to ship that material down to Rio Tinto's smelting business at Sorel in Canada, where they produce titanium dioxide, which is a pigment for paint.
And the market appears to be running slightly short of feedstock for titanium pigments at the moment. Rio has a problem with its Richards Bay operations in South Africa, due to ongoing violence and some tribal issues.
And so, there's some interruption there, I think ilmenite prices will rise, and I think this is very good for Bluejay Mining, so I'm quite keen to have that as a, shall we say, a wild card and more speculative idea within my portfolio.
Alongside Bluejay Mining, there's Base Resources (LSE:BSE) with a very good quality management team. They're working on a new project at Toliara in Madagascar. It's going through the processes of working up a full feasibility study. I reckon, because the team is good enough to work in this sort of difficult environment, I think they'll actually get this one going.
It's close to the coast and I think once they've finished negotiations with the government, and they've finished their own economic feasibility work, that will be good. And they will get great value for the product from the Toliara Project.
So, many people in the ilmenite industry quite liked this project, like to see it come into the market. And in the meantime, Base are extending what they're doing in Kenya at the Kwale Project, which has been running for several years and has shown that the management team know what they're doing.
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You predicted a good year for gold miners in 2019, and it was, there's lots of uncertainty around as the year closes out, what is the outlook for gold in 2020?
It's a much harder prediction from here and it's a great question, but there's so many things that could move gold up or down. I think if anything it's probably going to remain relatively flat, which is good for the gold miners, because the price is quite high.
But if Trump gets impeached, gold price almost certainly goes up, if there's more conflict in the Middle East, the gold price goes up. But, of course, if the trade war is settled, then the global economy starts to do a bit better, then the risk of interest rates going back up rises, then the dollar perhaps it would strengthen on the back of that, and gold would go down.
So, it's a bit tricky to call. What you're really calling is, is there going to be risk, more risk in the global economy, or less risk in the global economy? And right now, that's a tough one to go into.
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