Outlook for mining shares as China data brings relief

It’s not been a great start to the year for a lot of the UK-listed miners, but they’re up today. However, it’s a supplier to the industry that’s way ahead of them all. Here’s why.

A brighter mood today swept through the mining sector after dividend cuts and fears of a hard landing for the US economy left valuations as much as 17% lower in February.

The return of buying interest at the start of March came as manufacturing figures from China suggested the country’s Covid recovery is further advanced than economists thought.

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The optimism from the world’s second-largest economy and the support of a weaker dollar pushed Anglo American (LSE:AAL) 110p higher to 2,995p and Rio Tinto (LSE:RIO) up 269p to 5,981p.

Despite today’s improvement, both heavyweight stocks are considerably lower than where they were at the start of February. De Beers owner Anglo American was London’s worst-performing FTSE 100 stock in the month, falling almost 17%, while Antofagasta (LSE:ANTO), Endeavour Mining (LSE:EDV) and Rio Tinto were also in the bottom five blue-chip performers.

February’s selling came during a results season in which dividends and annual profits fell sharply from record levels in 2021, reflecting the impact of inflationary headwinds and higher energy prices as well as lower production volumes.

The average price for iron ore achieved in 2022 fell by a quarter compared to 2021 as China remained disrupted by the pandemic and fears for a global recession weighed.

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The outlook for commodity prices in the year ahead remains as tricky to call as ever, with the optimism of a potential demand boost from China’s reopening offset by signs that a sticky period of inflation will lead to even tighter monetary policy.

The uncertainty is highlighted in the City, where UBS has “sell” recommendations on Anglo American and Rio Tinto in contrast to Bank of America’s “buy” for iron ore specialist Rio.

The US bank said that 2023 was supposed to have been a year of oversupply, particularly for copper, but that it isn’t shaping up that way. The bank said reasons for this include a combination of ongoing Covid after-effects, a drought in Chile, the impact of Latin American politics and a slower than anticipated ramp-up of new projects.

The bank’s analysis of the results season highlighted that many companies now have balance sheets that are near debt free, providing resilience and optionality. However, cost inflation is still very real for most metals and mining companies, particularly labour and energy.

On the demand side, today’s official manufacturing PMI index from China offered encouragement after the reading jumped to 52.6 in February. This was the fastest pace of expansion in more than a decade and much higher than January’s 50.1 and the 50.5 forecast.

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As well as the benefit for mining shares, the update contributed to a turbocharged results-day performance by Weir Group (LSE:WEIR) as the mining technology business beat City expectations with a 40% rise in pre-tax profits to £348 million.

The Glasgow-based company, whose expertise helps mining customers achieve their productivity and sustainability goals, also increased its final dividend by 57% to 19.3p for a total of 32.8p across the year.

The FTSE 100-listed shares jumped 169p to their highest level since January 2021 at 2,068p, fuelled by Weir forecasting further growth this year based on a record opening order book.

Analysts at Peel Hunt said cash conversion at 87% was a standout in the results, putting net debt at £797 million compared with its forecast of £877 million.

The broker said long-term fundamentals remain attractive, underpinned by decarbonisation, GDP growth and the transition to sustainable mining.

It added: “In the near term, large greenfield mining projects are being slow to convert, so miners have to accelerate production from existing assets and develop harder and more complex ore deposits.

“For Weir, this translates into mid/high single-digit revenue growth through the cycle and a margin of 17% or above.”