Energy and natural resources

Brexit - good news for mining?

Much has been said and written about the potential economic fallout from the UK's vote to leave the European Union, but what has been the impact on the mining sector so far?

In the month since the referendum result, AIM quoted mining stocks have risen by an incredible 19%, lifting the doom and gloom that has plagued the junior mining sector for years, and could well be the start of a much needed bull run.

On 23 June 2016, the total market capitalisation of all the AIM quoted miners was £3.9 billion. Perhaps a surprise to some, a month later that figure has risen 19% to £4.6 billion, in contrast the FTSE 100 rose by around 6%.

A combination of investors rushing to commodities as a safe haven investment class and a weaker sterling making equities appear cheaper to foreign investors, are likely to be the main drivers.

A breakdown by commodity reveals interesting results. The US dollar spot price for gold, the traditional safe haven for investors in times of economic uncertainty has risen by over 5% in the month post-Brexit (19% rise in sterling terms), with gold mining stocks listed on AIM rising by a scarcely believable 23% over the same period.

Highland Gold and Pan African Resources drove much of that performance, adding £250 million in market capitalisation between them, Dalradian Resources and Aureus Mining Inc were other notable gold stocks outperforming the market.

Base metal miners also vastly outperformed their underlying commodity spot prices, with zinc and lead miners rising by 29% in the month following the referendum, versus a 10% and 6% rise in zinc and lead prices, respectively.

Copper has performed more modestly, with a 2% increase in LME spot prices against a 4% rise in copper mining stocks, perhaps due to the continued lull in industrial growth in the traditional copper buying countries. Nevertheless, most market commentators are very bullish on base metals and copper is expected to gain further ground in the near future.

We see this initial strong performance as extremely positive for the sector, not only in terms of share prices, but moreover for transactions and deals in the sector. In the past few weeks, we have already seen a number of London-based mining private equity funds complete significant transactions with listed companies, and the IPO pipeline is certainly improving, with a number of foreign based companies looking to tap into the vast amounts of money that is still waiting to be deployed in London. It appears that the prolonged wait for a recovery and correction in the junior mining sector could well be over. The longer-term trend for commodity prices is open to speculation, and there will undoubtedly be some market volatility over the coming months, but we believe dealmakers should act now, before prices and asset valuations quickly become over-inflated.

 

£'millions

Market capitalisation at 23 June 2016

Market capitalisation at 25 July 2016

% increase

Gold

                     1,663

                     2,052

23%

Potash & Phosphate

                      448

                      647

44%

Copper

                      386

                      403

4%

Gemstones

                      352

                      368

4%

Coal & Uranium

                      270

                      302

12%

Tungsten

                      104

                      114

10%

Lithium

                      101

                        97

-4%

Iron Ore

                        64

                        88

38%

Zinc & Lead

                        63

                        81

29%

Other

                      423

                      457

8%

Total AIM-listed miners

                   3,875

                   4,609

19%