- Mining stocks could prove to be riskier bets as they are highly correlated with ups and downs of the overall economy
- The business can be severely disrupted by changes in government policies, foreign currency fluctuations, and other unsystematic risks
- Still, including mining stocks in one’s portfolio could help in diversifying the risk
Apart from being capital-intensive, the mining business is also cyclical in nature i.e. it is highly correlated with ups and downs of the overall economy. It has been observed that mining businesses end up with a lot of debt on their balance sheet along with liquidity crunch by investing heavily during periods of economic growth. Even a mild change of government regulations could seriously turn the tables for the overall industry.
Mining could be a tough business with long gestation cycles, not suitable for every investor. However, including mining stocks in one’s portfolio could help in diversifying the risk. Industry experts suggest low-cost of operations and a strong balance sheet as minimum requirements before shortlisting miners so that they can survive through the inevitable downturns in the economy. This would allow the company to create value for its investors, even when the chips are down. Though, the business can be severely disrupted by changes in government policies, foreign currency fluctuations, and other unsystematic risks such as coronavirus pandemic. Therefore, investors must account for the risks associated with the business of a particular miner before investing.
As the world is looking for new sustainable development, the demand for metals and mining is expected to rise both in the short-and long-term horizon. However, investors must pick their stocks wisely and seek proper guidance, if required.
In this article, we would put our lens through 4 LSE listed stocks: Evraz, Vast Resources, Greatland Gold, and Red Rock Resource
- Evraz Plc (LON: EVR)
FTSE 100 listed steel producer, Evraz Plc witnessed a plunge of 5.1 per cent during its third quarter of 2020 in the total output of steel products due to lower crude steel availability. Due to lessened demand, Caspian Steel production reduced by 29.5 per cent in the third quarter of 2020 compared with the previous quarter. Also, due to lower pig iron availability, crude steel output decreased by 3.3 per cent in the third quarter of 2020.
Due to the slower economic recovery amid the coronavirus pandemic, which led to depressed demand across North American steel markets and slump in energy markets, the crude steel production was 13.3 per cent lower in the third quarter of 2020. The company did well in terms of exports during the third quarter of 2020 driven by 9 per cent surge in the sale of iron ore products. Due to increased steel utilisation rates and a slight recovery of the automotive industry, the sale of vanadium products grew by 13.4 per cent in the third quarter of 2020.
During the peak of unprecedented crisis, Evraz shares slipped to around GBX 200 mark, however, since then, Evraz shares have recovered by 80 per cent in value.
- Vast Resources Plc (LON: VAST)
AIM listed Vast Resources is a mining and resource development company with its major operations spanning across Romania and Zimbabwe. The Group recently made headlines as it concluded a joint venture with Chiadzwa Mining Resources for factoring community interests in the exploration of diamond fields. The Group aims to procure a special grant for the mining of diamonds from Zimbabwe Consolidated Diamond Company (Pvt) Ltd.
The coronavirus pandemic has proved to be a major hindrance as it has caused some inevitable delays in the processes arising out of implementation of health and safety protocols along with ravel restrictions. Moreover, the extension of Covid-19 lock-down in Zimbabwe has certainly slowed down the business activities of the company.
In the last one-year, Vast Resources have lost a lot of market capitalisation as the shares were down by 46 per cent.
- Greatland Gold Plc (LON: GGP)
The Company achieved high-grade results from Newcrest drilling majorly conducted last year. It has a decent financial position and continued its Paterson exploration programmes in 2020. Greatland Gold would continue to focus on moving the portfolio of assets up the value curve, with regards to its recent discovery of gold-copper deposits in Australia. It has raised £4.2 million in strategic financing to accelerate exploration in the Paterson region.
The fundraising has significantly strengthened the balance sheet. However, the Company is in the development stage and do not generate any revenue for the period. The profitability margins have remained stagnant or declined.
Moreover, the management identified certain risks related to COVID-19, which can lead to complete production shutdown, perils to employee health, and delay in supply of materials and equipment.
In the last one year, Greatland Gold shares have gained a lot of market capitalisation as the shares shot by 1,346 per cent.
- Red Rock Resources Plc (LON: RRR)
The natural resource development company with interests in gold, manganese and minerals, Red Rock Resources announced $19.6 million dividend pay-out to shareholders during the first half of 2021. With Chinese steel production running 6.8 per cent above 2019 levels for the first nine months of the year, the demand for manganese is expected to remain strong.
In the last one-year, Red Rock Resources shares have gained in market capitalisation as the shares shot by 60 per cent.