SINGAPORE (Dec 20): With numerous industries around the world depending on the supply of minerals and metals, miners are pivotal to the global economy. Yet, miners seem to have encountered a tough year, grappling with issues such as geopolitical uncertainties and a slowing global economy.
According to KPMG’s 2019 outlook, macro financial risks pose the biggest risk to the mining industry. Other factors include access to capital, an economic downturn and political instability.
According to Deloitte’s global consulting mining and metals leader Andrew Swart, the mining industry is going through a lot of changes. “The mining industry is changing faster than ever, resulting in greater growth potential as well as more disruption and volatility than in years past,” he said in a recent interview this year.
But market watchers are quick to highlight that, unlike other industries, the mining sector is not all about the numbers.
“One thing is clear — mining requires far more than good financial performance in order to realise value in a sustainable manner,” says Jock O’Callaghan, global leader for mining and metals at PwC Australia. “In spite of the strong operating performance, investors seem to be down on the brand of mining. They question whether the industry can responsibly create sustainable value for all stakeholders.”
On the local front, mining companies appear to have begun streamlining their operational costs, adopting a careful approach on acquisitions. They have also taken to diversifying operations in the hopes of being better positioned to weather the storm.
Gold shines
The US-China trade war, persistently low yields and geopolitical risks have led investors to seek safe-haven assets and as a result, gold, the perennial favourite, has enjoyed a lift this year. “We expect fear-driven investment demand for gold to be supported by late-cycle concerns, political uncertainty and high [developing market] household savings,” says Goldman Sachs in a recent report. Year to date, the price of gold has rallied 18%. It was US$1477.31 on Dec 16.
As gold prices rise, earnings of gold miners, such as CNMC Goldmine Holdings, have increased correspondingly. For its 3QFY2019, the Catalist-listed, Malaysia-based gold miner recorded an eightfold jump in earnings to US$2 million ($2.7 million).
CEO Chris Lim, however, is seeking to avoid putting all his bets on gold alone. As a hedge, CNMC has begun exploring its Sokor and Pulai concessions for other minerals such as lead, zinc and iron ores.
CNMC was forced to abort its plan to list in Hong Kong, as its market value could not meet the minimal requirements at the time of its application. Year to date, CNMC’s share price has increased 17%, closing at 24 cents on Dec 16. That puts the company in a comfortable valuation level above the requirements. However, in an interview with The Edge Singapore in October, Lim said the board’s preference was not to revisit a Hong Kong listing but to focus on improving its operations.
Separately, Mining and Minerals Industries Holding (MMIH) is looking to inject its wholly-owned subsidiary, MMJV, which owns gold mines, into shoemaker China Hongxing Sports via a reverse takeover. Since 2011, trading of China Hongxing has been suspended because of accounting irregularities. The company’s controlling shareholders, the Wu family, have bought out the operating assets at a heavy discount, leaving what MMIH president Kunal Awasthy calls a “relatively clean shell”. An IPO is also in the pipeline, as MMIH needs $15 million to $20 million to take all its three existing mines to production.
According to Awasthy, gold can never be a poor choice for investments. “I don’t see gold prices going down in the near future; in fact, it will be interesting to see gold cross the US$2,000 mark,” he says.
Even LionGold Corp, one of the three penny stocks allegedly manipulated by John Soh Chee Wen and Quah Su-Ling in 2013, has seemingly turned the corner. For the three months to Sept 30, the company reported earnings of $1.3 million, compared with a loss of $400,000 a year ago. It reported that revenue rose 12.4% y-o-y to $18.5 million. During the period, LionGold produced and sold a lower quantity of gold: 9,182 ounces versus 9,945 ounces in the preceding year. However, its average selling prices was higher: A$2,143 an ounce compared with A$1,658 an ounce a year ago.
For obvious reasons, most investors have steered clear of this stock, whose share price has been languishing at the rock-bottom level of 0.1 cent for years after the penny stock crash. Yet, in recent months, it has piqued the interest of certain individuals from China. In October, Yao Liang and Yao Yuan, via their entity Yaoo Capital, now own 72.57% of LionGold after they forked out $23 million to take up 23 billion new shares.
Coal’s dusk
While gold shines, coal, as a whole, is entering a gloomier phase. The call for clean, alternative energy is gaining momentum, even though coal is still an economical fossil fuel to produce.
Both Geo Energy Resources and Golden Energy and Resources (GEAR) saw a drop in their revenues in the most recent set of results. The former went into the red with a loss of US$11.5 million compared with a profit of US$6 million in 3QFY2018, while the latter saw its earnings plunge 72% to US$4.2 million from US$14.9 million a year ago, owing to lower coal prices, as demand weakened in key markets such as China and India. “Asian thermal markets’ supply and prices were affected by the prospect of China’s introducing fresh import restrictions,” said Geo Energy in its earnings call.
GEAR noted that although China’s coalfired power generation is expected to peak in 2025, slowing demand growth and the country’s recent goal of limiting carbon emissions were likely to affect coal generation.
“Looking ahead, GEAR remains optimistic on the near- to medium-term outlook for thermal coal in its key markets and believes that demand will continue to be supported by the growing energy requirements of developing countries,” reported GEAR.
Geo Energy’s share price has fluctuated over the years. It plunged to a low of 10 cents on July 29, 2016 and soared to a high of 35 cents on April 7, 2017. Year to date, shares in Geo Energy have declined 13%, closing at 15 cents on Dec 16 and giving a market capitalisation of $207.1 million.
Meanwhile, GEAR’s share price has plunged 69% since its debut on the Singapore Exchange in December 2016, closing at 16 cents on Dec 16. The company is trading at 44.29 times historical earnings and has a market cap of $374.1 million.
However, one of the smaller SGX-listed coal miners, BlackGold Natural Resources, was the outlier of the pack. For 3QFY2019 ended September, the group’s losses narrowed to US$600,000 from a loss of US$1.1 million a year ago. This came on the back of a fourfold increase in sales, on the back of its new customer, Indah Kiat Pulp & Paper, a subsidiary of Asia Pulp & Paper group.
Year to date, BlackGold Natural Resources’ share price has remained relatively stable. However, since its listing in March 2005, its share price has plunged 98%, closing at 0.9 cent on Dec 16, which puts the valuation of the company at $9.03 million.
