RCF Mining Market Commentary: Q223

Commodity and Mining Investment Quarterly Update

Commodity Insights

Fear and greed may drive markets, but there is one driver that remains stronger than both: need.

For decades, developed markets have had limited need to think about, or value where metals and minerals are sourced from, as the world pursued the efficient allocation of resources on a global level (aka globalization). Globalization introduced heightened economic and societal fragility, and this is now changing, but the average investor has not yet necessarily noticed. So far in 2023, investment returns continue to be driven by liquidity (e.g., Bank Term Funding Program or BTFP) and narratives (e.g., Artificial Intelligence). By comparison, the metals and mining market has been flat over the year, suggesting there is still time to get ready.

By way of example, RCF has compared the change in market capitalization of BHP Group Limited (“BHP”) vs. Apple Inc. (“Apple”) over the past six months.

Figure 1: BHP vs. Apple

Before normalizing the change in the above graph, BHP (the world’s largest mining company) held a market capitalization of $158B, while Apple (the world’s largest public company) enjoyed a market capitalization of $2,070B on 1 Jan 2023. By 30 Jun 2023, BHP’s market capitalization fell 4% (to $152B) while Apple’s rose 48% (to $3,050B). At the start of 2023, Apple was worth 13 BHP’s. Just six months later, Apple was worth 20 BHP’s.

Quite simply, what the world wants continues to outperform what the world needs, considering that Apple’s products remain discretionary purchases. Comparatively, Apple does not exist without BHP production, with 2/3rds of the periodic table going into a modern smartphone; let alone the plant, property and equipment value chain that produces the Apple product mix.

More broadly than BHP and Apple, financial flows into the metals & mining sector remain subdued over H1 2023, so the investment environment entry point remains wide open, as shown by the graph below.

Figure 2: Broad Metals & Mining Indices

Predicting when investors may start to value what the world needs ahead of secondary or tertiary preferences (what the world wants, when needs are covered) is difficult, but signs that things are changing are observable. Specifically, RCF notes:

  • Move towards enhancing supply chain resilience. Resilience entails having material supply choices and transparency; this must be invested in ahead of time. To date, this investment is significantly lagging in developed markets.
  • Manufacturing vs. mine development speeds. Manufacturing trends (e.g., electric vs. internal combustion engine vehicles) and battery manufacturing plant construction are moving much quicker than mine development.
  • Inventory drawdowns and expanding critical minerals lists. Above-ground inventories continue to be drawn, with traders warning warehouse stocks are depleted, along with countries expanding its critical mineral lists to include larger markets (e.g., the US adding copper).
  • Weaponization of trade flows. US with semiconductors, China with gallium and germanium, Saudi Arabia with crude oil. The geopolitics of trade are growing more tense.
  • Commodity encumbrance. Off-take volume security from physical operations is inherently scarce; the opportunity to invest in better development projects is even more scarce. Many downstream companies are realizing this dynamic, along with the associated ‘bullwhip’ effect when the orders flow upstream to primary producers.

These signs all point to the relative future scarcity of metals and mineral output, along with access to high-quality development projects, on a forward-looking basis. At some point, the overriding RCF message of “Get Ready” will flip to a clear “Go” as the overall metals and mining sector moves demonstratively into the Growth Phase. But the market is not there yet, in line with prior RCF investment environment guidance.

In the meantime, the overriding RCF investment environment message remains “Don’t Wait” to be sufficiently allocated to the metals and mining sector before the market turns upwards.

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This material is provided for educational purposes only and should not be construed as research. The information presented is not a complete analysis of the commodities landscape.  

The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Resource Capital Funds and/or its affiliates (together, “RCF”) to be reliable. No representation is made that this information is accurate or complete. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.   

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