MONDAY MACRO: Here’s how the mining industry has performed prior to a potential growth catalyst
The Philippine mining industry recently received a massive regulatory tailwind because of the government’s plans to expedite the country’s economic recovery.
While it remains to be seen how each mining company will act, the industry’s aggregate Uniform ROAs show that the group seems to be well-positioned for taking advantage of this growth.
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The Mining and Oil sector of the Philippine Stock Exchange (PSE) has recently been one of the most rapidly rising sectors in the country.
In April 2021, the Philippine government removed a nine-year moratorium on new mining deals and renegotiation of current deals to increase the country’s revenues amid the pandemic.
The mining industry had actually grown by 1.13% in 2020 when other industries had seen contractions because of the lockdowns. Nickel ore, a primary material for stainless steel, contributed to 52% of total earnings thanks to China’s growing demand for stainless steel.
Apart from higher demand, metals also enjoyed higher prices mainly because of the depreciation of the US dollar. Combining these two tailwinds with the 2018 mining tax reform doubling excise taxes from 2% to 4%, the country stands to earn a lot more from increased mining activities.
While it will take some time to churn out profits from the new mines, investors are nonetheless optimistic about the industry’s outlook.
With the lifting of the moratorium, existing mines can now renegotiate their mining deals. Mining companies aren’t just evaluated on operational efficiency; the remaining life of their mines is also a key valuation measurement. Higher ROAs can still be accompanied by declining valuations if the mine is close to full depletion.
Therefore, potential extensions of operations at existing mines signal growth potential for the industry.
However, industry tailwinds are meaningless if companies are unable to capitalize on it and generate profitability. For the mining industry, this does not seem to be an issue.
Historically, the aggregate Uniform ROAs of Philippine mining stocks were mostly negative, particularly from 2001-2009, as only some were able to successfully commercialize their mining rights.
Since then, the group has been able to generate consistently positive returns, ranging from 4%-10%. Companies like Semirara (SCC:PHL) have been able to improve operations, while Nickel Asia (NIKL:PHL) was able to list on the PSE.
Compared to the Uniform ROA of the publicly-listed companies in the Philippines as a whole, the mining industry over the past decade has generated much higher peaks, but also lower troughs. This isn’t unusual, since mining companies are commonly understood to be more cyclical than average, due to the volatility of mineral prices.
Regardless, recent Uniform ROA levels show that the mining industry has been able to thrive whilst the moratorium was in effect, positioning the group well to capitalize on the policy lifting.
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“The Monday Macro Report”
When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.
Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.
Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.
Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.
Hope you’ve found this week’s macro chart interesting and insightful.
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