Capital Equipment News December 2020

THOUGHT LEADERSHIP – MINING OUTLOOK

The mining industry outlook

While no two cycles are the same, the one thing that stands out in this cycle is the sheer volatility. There have been massive moves daily, not just weekly or monthly, which leaves analysts confused as to whether we are up or down. Another thing that stands out is the breakdown in several long-term metrics that are usually tracked. By Avinash Kalkerpersad , head research analyst, and Arnold van Graan , equity research analyst at Nedbank.

T here are certain factors that drive the metal price, but over the last few months, these seem to have fallen by the wayside. What is reflected in the market and on the ticker, boards are not necessarily a reflection of what’s happening in the fundamentals, which is challenging. So, what is really driving this market? What are the factors one should look at to really understand where this is going and what will the new norms look like? This is quite challenging, but the cycle has been good to the sector with most resources going up sharply, gold being the standard – and that is key. It is the breakdown of fundamentals and the volatility that are the real challenges in this sector. Gold has seen a 100% return, year-to- date compared to the All Share Index at -1%. The resource sector is up 18% which includes Platinum which is up by 13%. This indicates good performance. On a one-year basis, resources are up 34%, platinum is up 100%, gold is up by 140% and the All Share Index is up only 4%. Looking at it on a five-year basis is where the excitement around gold really is, with it being projected to go up by 580%, platinum up to 250% and resources in general up 75% compared to the All- Share index going up only 12%. This is the wonder of resources and mining. When you think it is down and out, you get a bull market. The uniqueness of this sector is that a big reset can occur and make up everything you’ve lost in the past few years within a few months. Key drivers The direction of this rally will be determined by two things – one being the outcome of COVID-19 and whether

we will peak or see the second round of infections, the other being how much money central banks and governments will invest into the financial systems to boost the economy. These will be key drivers of commodity prices and their trajectory, gold included. There are two important drivers of demand, one being China and the other being stimulus, and these are interlinked. Most of the metals produced both in South Africa and globally are consumed in China. The resource sector is greatly affected by the Chinese economy. With a strong rebound in China after the damage from their lockdown, it is net positive for the rest of us. There are a lot of goods which are manufactured in China, and end up being exported and consumed elsewhere.

They are a big vehicle manufacturer so approximately 65% of PGMs are consumed in China. This is important for the PGM sector. We are in a familiar situation which we saw at the end of the global financial crisis in 2008. A good way to get the economy going again is to get people to spend money and that comes down to stimulus and QE and the like. It will not only push money into the system but also revitalise it. Approximately 70% of all PGMs produced go into the auto industry and the bulk of that goes directly into China. There was a decline in global vehicle sales pre- COVID-19 which raised questions around the long-term future of the industry. A major disruptor in the industry remains electric-powered vehicles and the impact

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