[VIDEO ANALYSIS] An analysis on the top mining stocks: BHP, Rio Tinto Ltd (RIO), S32 and Newcrest Mining
Next question. Renee from Victoria asks, "Hi team. Rio, BHP, South 32 and Newcrest all mine different metals with different directions in the market. I would love to hear your views on all of them."
So, they're not all completely different. BHP and Rio can be kind of grouped together here because they have been following a similar strategy recently. They've both been paying down significant amounts of their debt and deleveraging their balance sheets. So this is giving them a much, much stronger balance sheet than they had, even a year ago.
And I should say as well, iron ore is a huge influence over both companies as well. So the reality is if iron ore drops 50% or gains 50%, both of those are going to be exposed.
Sure, yeah. The iron ore price has shot up quite a lot recently, as well as the coal prices and as a result, they're both now generating strong profits and cash flow. But yeah, as Shannon said, "That's like highly dependent on the direction of the iron ore price." Some people think that iron ore is due for a pull back considering the strong run but that's obviously extremely difficult to predict.
I should say to some degree, we've been calling for that as well and we've got it wrong and that's why don't like to make those sort of calls. The short term direction of any of these metals is so hard to predict. With iron ore, we've been, obviously, seeing huge amounts of new capacity coming to the market. And the surprise though, has been the increasing demand from China, which is why the price has shot up so much. But that was not expected and the market was very much, and certainly even Joe Hockey was expecting far lower iron ore prices in the budget cut a few years ago.
Right. So similar story with coal prices. China decided to cut their output, which nobody probably could've predicted, causing the spike in the coal price. You just don't really know what's going to happen with those prices. The other benefit for both of these companies, in fact many mining companies, is that because of the downturn in commodity prices over the last couple of years, they've all worked on reducing their costs. And so now they're getting the double benefit of lower costs and higher commodity prices and those two factors are certainly playing into BHP and Rio.
South 32 is a similar story. They're more sensitive to aluminium, coal, and manganese prices, all of which have been going up over the last year so that is a similar story. Their half-one of 2017 was profitable with strong, free cash flow but again, they're gonna be tied to the direction of those commodity prices.
Newcrest, although a miner, is probably in a slightly different boat as it's a gold miner. It has a very low all-in sustaining cost. So this is the cost of extracting an ounce of gold, which is $770 an ounce, that's US dollars, which is well-below the current gold price of around 1,200. So they do have a very strong margin and in the scheme of gold producers, that all-in sustaining cost is definitely on the low end. They've also been reducing debt recently, so they are trying to strengthen their balance sheet there. The great thing about Newcrest is they have a very long reserve life. So they have, at current mining rates, they have 27 years worth of gold reserves. So they're not reliant on exploration success.
Yeah, the other note I'd probably make about something like Newcrest is that it is a good portfolio hedge against anything unexpected that Trump might do. If he does something crazy, which is entirely possible, that could see a rally in the gold price and therefore, having a gold miner in your portfolio could benefit from that.
I might just add that, of all of them, gold undoubtedly is the hardest to predict. I've said that it's been so hard to predict on it all but the reality is those commodities are still very much driven by demand and supply, and Newcrest is obviously far, sorry. Gold is far different, so I almost think that if you are taking a view on gold, to bring into the equation, individual miner risk might not be what you're after.
I mean, Newcrest is a very well-run company although they have had their problems over the years. So if you want to eliminate any potential risk from that, you could simply buy golded ATF or something like that if you were bullish. Whereas Rio, BHP, and South 32, their commodities, I guess, reflect an underlying theme that you might, like certainly the China story very much still remains one that a lot of people believe in and certainly, if that pans out, then all of those could see significantly high prices over the long term. They remain three of the lower cost producers of their commodities.