04. January 2021 | 10:49 CET
Vale, Almonty Resources, Glencore: commodity stocks for 2021
Although the news is primarily dominated by the pandemic and the effects of the lockdown, the economy continues to turn. Many service providers are suffering from the pandemic, and the structural change it has triggered. The situation for producers is quite different: Manufacturers of electrical appliances and electric cars are sitting on full order books and looking to a rosy future. Mining companies are also feeling this optimism: since the pandemic's outbreak, commodity prices have been on the rise. Project financiers and major investors are not backing down or adopting a wait-and-see attitude, even in times of crisis. For private investors, this is a good sign - there is something to be gained in the commodities sector.
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ISIN: CA0203981034 , BRVALEACNOR0 , JE00B4T3BW64
Vale is not a sure-fire winner
The share price of the Brazilian mining group Vale has moved upward in recent months. Although cash flow is declining and sales are also weakening, the group has managed to return to profitability. Vale did particularly well in the iron ore and nickel sectors. The latter raw material, in particular, is benefiting from the rising demand for electric motors. Vale wants to get as big a slice of the nickel production pie as possible.
Vale's example shows that raw material companies do not depend exclusively on extraction costs and market prices. After the group was held responsible by a Brazilian court for the Brumadinho dam burst at the beginning of 2019, claims worth billions still exist against the Company.
While Vale is demanding money for its part, such legal disputes are always poison for a share price. Although the stock gained about 25% on a one-year view, the accompanying circumstances weigh on the price. In addition to the legal dispute, Vale has a relatively low equity ratio compared with the rest of the industry, and it does not have the best cost structure. The share is, therefore, not a sure-fire winner. However, if the legal disputes disappear, this could be a catalyst for rising share prices.
Almonty Industries: Tungsten hope outside China
While Companies like Vale mine a wide range of raw materials and are thus prepared for all eventualities, Almonty Industries focuses exclusively on tungsten. In addition to two existing mines in Spain, Almonty is developing the largest tungsten mine outside China in South Korea, making it a significant player for the industrial metal. Tungsten is also benefiting from the electrification of mobility and is primarily used in charging stations. Already today, around 30% of demand comes from the automotive industry. Other sources of demand are the mining industry, the energy sector, aviation and the construction sector. According to the European Union and the US Congress, tungsten is one of the critical industrial metals whose stock should be secured for industrialized nations.
Almonty Industries’ planned tungsten mine in South Korea reinforces the country's ambition to further expand its influence around the production of processors, memory chips, LEDs or LCDs. The Sangdong mine is located around 190 kilometers southeast of Seoul and is scheduled to go into production in 2022. The mine boasts high tungsten content, a long production time and low costs. All regulatory approvals have been granted, and a potent financing partner has been found in the German KfW. The share price has risen by around 50% on a one-year horizon. From a technical chart point of view, the stock is in a consolidation formation that could be resolved upwards beyond rates of CAD 0.81.
Glencore: Bad boy with potential
When it comes to industrial metals, investors often think of the Glencore share. Since the former commodities trader merged with Xstrata in 2013, the new Company has been involved in the extraction of all kinds of raw materials. Glencore suffered a drop in sales in the first half of the fiscal year, primarily due to falling oil prices. As with Vale, Glencore is repeatedly facing accusations: In addition to environmental violations, corruption is also a recurring issue. In a world in which even commodity companies increasingly have to be measured against sustainability criteria, this is not good news in addition to the associated legal risks.
The share price fell sharply in the first half of 2020 but picked up even more sharply towards the end of the year. Over a twelve-month period, the share price did not show a great return, rising by just 2.6%. However, if one looks at the share price from a long-term perspective, Glencore may have exited its downward trend, which has been intact since mid-2018, to the upside. The share around copper, nickel, zinc, aluminum or even oil and coal and agricultural products, could develop potential in 2021. However, risks are not off the table.