Monsters of Rock: RBC says Chinese credit injections could end correction for big miners
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Chinese demand has overtaken the crisis in Ukraine as the dominant theme in metals markets over the past few weeks as Covid lockdowns have done a number on its economic growth plans.
It has seen turbulence hit previously soaring mining stocks as prices for commodities like iron ore and base metals have softened at the same time as Russia’s invasion has kept energy prices for oil, gas and coal stubbornly high.
Now China is fighting back against both the threat of recession and the narrative.
Chinese state news agency Xinhua has accused the western media (us included, we guess) of fallacies in its reporting “hyping up China’s suffering from a loss in foreign investment and supposed economic stagnation”.
“The ultimate goal of these bizarre claims is to discredit China’s economy and its dynamic zero-COVID policy.
“None have a leg to stand on.”
Bizarre, they say, despite China’s own economic data pointing to a slowdown wrought by its Covid Zero policies.
That came out on Monday, just one day later the State Council led by Premier Li Keqiang came out with a series of 33 measures across six aspects designed to help boost the local market and maintain employment, including a broad range of tax relief and credit injections.
They include the issuance of 300 billion Yuan of railway construction bonds along with support for a new round of rural road construction and renovation. That is all supportive for metals, especially steel and iron ore which derive the bulk of their downstream demand from property and infrastructure construction.
Beijing is also pledging to start a number of new hydropower and coal-fired power projects this year.
“For China, development is the basis and key for resolving all problems. We must efficiently coordinate COVID response with economic and social development and better use the experience we gained in the past two years,” Li Keqiang said in a statement.
“Policy support must be beefed up, and policy measures should be swiftly rolled out wherever needed, to keep major economic indicators within the appropriate range and ensure stable overall economic performance.”
At least that’s the view of RBC Capital Markets and its Australian mining analyst Kaan Peker.
All up, he said, the measures including 1.88 trillion Yuan in credit support for small and struggling firms add up to 2.1t Yuan in support. It is not the major stimulus of years gone by (just 2% of GDP compared to 13% in 2020, 17% in 2016 and 20% post GFC in 2009) but could be ramped up as the economy reopens.
“We continue to believe that the policy stance is shifting to be more supportive,” Peker said. “However, the announcements so far are still consistent with smaller stimulus than in past downturns (2016, 2020, 2009).
“Nevertheless, there is good reason that credit growth will increase. A wider relaxation of lending controls would be the next step and seen as another positive.”
That should support Aussie miners who have sat in limbo as commodity prices have slowly crept back from recent highs.
“Recent macro headwinds have weighed heavily across the Australian mining sector over the last few months,” Peker said.
“With our coverage forward EV/EBITDA multiples compressing to ~4x, well below the through-the-cycle average of ~6x.
“While we brace for more volatility in the short run, an expected recovery of Chinese economics activity (in JuneQ as policy support picks up), we anticipate will shore up/support: 1) forward earnings expectations, and 2) place a floor in valuation multiples; the two key factors which we believe have driven the recent sector correction.”
The mining heavy materials index started the day well before tapering off to a 0.59% gain, with gold stocks faring well after prices for bullion rose overnight.
Lab services provider ALS (ASX:ALQ) posted an underlying NPAT of $264.2 million for FY22, up 42.1% year on year, powered by improving margins from its geochemistry business.
That largely means drilling samples, which have been flying into labs thicker and faster than they can handle with the rapid uptick in exploration and mining activity in recent years.
Despite drawing lower revenues than its life sciences division, ALS’ commodities division took the cake when it came to underlying EBIT and margin, lifting 42% and 230 basis points respectively to $245 million and 29.9%.
Driven by large drilling samples volumes, commodities saw a 31.1% increase in revenue to $819.1m, while life sciences revenue grew 24.2% to $1.154 billion.
Earnings from ALS’ industrial division however fell 17.1% to $17m.
ALS will pay a 17cps dividend for FY22, taking its total payout for the year up 42% or 9.7c to 32.8c per share, a payout ratio of 60% of NPAT.