Mid-tier mining companies on the rebound with investors

The nation’s mid-tier miners are experiencing a performance and market resurgence as the sector rebounds.

PricewaterhouseCoopers says the worst seems to be over for the mid-tier mining sector.

The nation’s mid-tier miners are experiencing a performance and market resurgence as the sector rebounds after bottoming and improved performance draws more investors into the sector.

In its annual Aussie Mine survey of the nation’s top-50 miners with a market value of less than $5 billion, PricewaterhouseCoopers says the worst is now behind the sector.

Pre-tax earnings for 2015-16 flipped to $3.3bn, from an $800 million loss a year earlier, and market value grew by 23 per cent over the period to $44.5bn.

With market value surging ahead of book value, it indicates investors are again expecting growth.

“Investors have discounted mining as an option over the past three years, but people are starting to open the page again,” PwC mining leader Chris Dodd said.

“When the money left (stockmarkets) it left mining disproportionately, so perhaps it will come back in disproportionately.”

RBC Capital Markets analyst Paul Hissey said sector rotation was under way among investors, prompting a recent rally in mid-cap base metal miners.

“This rally is, in our view, a result of funds flow within the Australian market, which has also benefited the large-cap miners, and badly hurt the precious metal producers on the back of higher likelihood around US interest rate moves,” Mr Hissey added.

An interesting finding of the PwC analysis was that the market value of the mid-cap sector was 47 per cent higher than its book value, up from just 3 per cent higher last year.

Mr Dodd said this indicated investors were paying for growth.

“If you’re at about book value, there’s literally no value being placed on the actual recoverable resources because that’s not a balance sheet item,” Mr Dodd said.

“It’s a point of confidence, that investors see there is value in getting minerals out of the ground, not just recovering sunk costs.”

Gold miners had a combined market value of $20.6bn, making up 46 per cent of the mid-cap top 50, up from 20 per cent a decade ago when the first Aussie Mine survey was done.

This year, coal and iron ore companies made up just 8 per cent of the index, down from 32 per cent in 2006, when they were the leading sector.

“The low-cost iron ore majors (BHP, Rio and Fortescue), decreasing their market capitalisation from $6.3bn to $1.8bn between 2014 and 2016,” Mr Dodd said. “Mid-tier coalminers have consolidated and emerging technologies have resulted in strong demand for lithium and graphite.”

Mr Dodd added that the investment boom of the past decade, the biggest in recent memory, was starting to provide fruit. “The good thing about investments is they should reap dividends, and part of the next act is they should see the dividend come through of a lot of that spend.”