The Mining Sector on the Stock Market

18 de Maio de 2021

The mining sector is one of the pillars of the country's economy, with revenues of 70 billion reais in the first quarter of 2021 alone, according to IBRAM. It also generates jobs and income. When it comes to the mining sector and the stock market, investment is generally associated with basic raw materials, such as iron ore, and the companies that commercialise it or use it as an input in their processes, such as Vale, CSN, Gerdau and Usiminas.

In order for a company to have its shares traded on the stock exchange, an IPO (Initial Public Offering) must be carried out. Companies must comply with a series of transparency and accountability rules for the financial market and regulatory bodies in order for their shares to be offered to the market. In today's article, we'll talk about how the mining sector is present in the financial market, especially on the stock exchange, as well as exposing new perspectives.

Minério de Ferro, principal insumo para a indústria siderúrgica. Fonte: Exame Invest.

The Stock Market and Mining

In Brazil, there are still few companies in the mining sector listed on the Brazilian stock exchange,B3. Currently, the companies in the mining and steel sectors that have been most prominent on B3 are Vale, CSN, Gerdau and Usiminas. The market is governed by supply and demand, so the two sectors are closely linked, especially when it comes to iron ore, the main input for steel production.

Basic raw materials, such as iron ore, have their price determined by the world market. As such, it can be an investment option, traded on the B3 through the Futures Market, providing capital protection and advantageous gains. However, it is a high-risk investment, recommended for experienced investors.

Cotações das ações da Vale (VALE3) e os preços dos contratos futuros de minério de ferro com vencimento em maio (TIOK21). Fonte: Seu Dinheiro.

Mining shares

The high demand for iron ore combined with high prices is directly benefiting mining companies, especially Vale, as well as steelmakers CSN, Gerdau and Usiminas.

Vale's results for the first quarter show this beneficial scenario. Net revenue more than doubled compared to the same period in 2020, reaching R$69.3 billion. In addition, it made a net profit of R$30.6 billion, while from January to March 2020, the gain was R$984 million. In addition, Vale generated almost US$ 6 billion from operations in the quarter. In terms of dividends paid by Vale, the second half of 2020 distributed R$4.26 per share. Expectations for 2021 are positive, given that the results presented so far are better than the previous year.

Thus, the behaviour of Vale's shares and the price of ore are closely linked. The graph below shows this scenario.

Preço das ações da Gerdau (GGBR4), CSN (CSNA3) e Usiminas (USIM5), de janeiro de 2020 a maio de 2021, frente a demanda por aço. Fonte: Seu Dinheiro.

Steel stocks

As a result, the steel mills are benefiting from this rise in iron ore prices. As it is the raw material for steel production, the final product of Gerdau, Usiminas and CSN has become more expensive. According to the National Institute of Steel Distributors (INDA), prices were readjusted by 35% this year alone, and in 2020, the accumulated increase reached 90%. Even in the face of the pandemic, civil construction and the basic industry continued their operations, and as a result, steel sales continued to rise.

Like Vale, the steel companies Gerdau, Usiminas and CSN reported positive results for the first quarter. With revenue and profit on the rise, cash generation and a drop in debt, this is what the balance sheet for January, February and March brought with it. Gerdau has an additional factor allied to the Joe Biden administration's infrastructure incentive plan. The company has operations in the US and would therefore be able to capture the increase in demand for steel.

The Price of Iron Ore

The price of iron ore is linked to demand from the steel sector, both domestic consumption and exports, as well as the rise in the dollar. China is currently the main buyer of iron ore, due to its intense development in the infrastructure and construction sectors. The trend is for demand for iron ore to grow, along with its price, and consequently the stock market for companies in the mining and steel sectors is expected to grow.

Gráficos que mostram a importação e preço do minério de ferro em Qingdão, província da China no período de fevereiro de 2018 a março de 2021.

Comportamento dos contratos futuros do minério de ferro. Fonte: Trading Economics.

The price figures are promising. In December 2020, a tonne of iron ore in the Chinese port of Qingdao was worth $159.85. On 11 May 2021, iron ore was trading at $228.93 a tonne, an increase of more than 40% in just five months. Futures contracts and quotations in other Asian ports also exceed US$ 200 a tonne, as shown in the Graph below.

Operações da Aura Minerals no Continente Americano Fonte: Aura Minerals/Invest News.

The first gold mining company on B3

Aura Minerals was the first gold mining company listed on B3 in July 2020. The company originated in Canada, where it has also been listed since 2006 on the Toronto Stock Exchange (TSX), and in 2020 decided to go public in Brazil. It has operations in Mexico, Honduras, the USA and Brazil, and some ongoing projects as shown in the image below.

Gold is known as a safe haven in times of crisis. The metal is considered worldwide to be one of the safest financial assets in the economy. This is because, as well as being a physical asset, gold serves as the backing for many countries' monetary reserves, and its value and demand are always guaranteed. To find out more, read our articlehere.

The mining company's performance over the last year can be seen in the graph below.

Desempenho da Aura Minerals: Julho/20 a Maio/21

Performance of foreign companies with operations in Brazil

The investor market is global, and in addition to the companies traded on the Brazilian stock exchange, there are companies with operations in our territory and shares traded on stock exchanges outside the country, such as the TSX and ASX, for example. Examples of these companies include Sigma Lithium Resources, Anglo Gold Ashanti, Yamana Gold and others.

Sigma Lithium, a Canadian company, has a lithium extraction project in the Jequitinhonha Valley, Minas Gerais. Lithium is the raw material for electric car batteries, an evolving technology worldwide. The shares (SGMA) are traded on the Canadian stock exchange, TSXV. The graph below shows the company's performance over the last year.

Desempenho da Sigma Lithium na bolsa canadense, TSXV: Junho/20 a Maio/21

Yamana Gold, a Canadian mining company, operates in Brazil in the state of Bahia, in the cities of Santaluz and Jacobina, extracting gold, as well as other mineral exploration projects under development in the country. Its shares are traded on several stock exchanges, including London, New York, Canada, Germany and Buenos Aires. Last year's performance on the Toronto stock exchange can be seen in the chart below.

Desempenho da Yamana Gold na bolsa de Toronto: Julho/20 a Maio/21

Anglo Gold Ashanti, a major gold producer in Brazil since 1834, has operations in Minas Gerais and Goiás. Its shares (ANGJ) are traded on 5 world stock exchanges: Johannesburg, New York, Frankfurt, Dusseldorf and Sydney. See below for last year's performance on the New York Stock Exchange.

Desempenho da AngloGold Ashanti na bolsa de Nova York: Julho/20 a Maio/21

In short, it's important to emphasise that performance figures encompass various factors, such as production, global demand, local conflicts, stock market corrections, among others. Therefore, in order to make a more accurate assessment, it is important to evaluate all the factors combined with the results presented.

Mina de minério de ferro. Foto: Getty Images

New Perspectives

In June 2020, the debate between the director of B3, the director of TSX/TSXV, and the chairman of the board of the Brazilian Association of Mineral Research Companies (ABPM), mediated by the director of the Brazilian Mining Institute (IBRAM), brought new perspectives. In March of the same year, IBRAM signed a Memorandum of Understanding (MOU) with the Canadian stock exchanges Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV) to establish a collaborative relationship with the aim of increasing investment in the Brazilian mining sector in the coming years. It's worth noting that the Canadian stock exchanges are one of the main locations for the world's most important mining, oil and gas companies. As such, the expansion of geological research, exploration and development of mining projects in Brazil is expected.

The Brazilian stock exchange believes in the potential of mining companies, as well as small and medium-sized mineral exploration companies, to raise funds on the capital market. The aim is for B3 to work together with IBRAM and the Canadian stock exchanges, TSX and TSXV, as well as with the government, to evaluate the creation of specific regulatory instruments so that these companies can find open doors to access capital in both the national and Canadian financial markets.

In an article published by In The Mine, Fernando Ferreira, Chief Strategist and Head of Research at XP Investimentos, points out that Brazilian mining companies interested in attracting investors need to pay special attention to good ESG (Environmental, Social and Governance) practices, i.e. respect for the environment, social issues and solid governance. In addition, Guillaume Légaré, Head South America at TSX, stresses the importance of the quality of specific technical geological reports to prove mineral reserves, as well as a governance team with the capacity to develop projects efficiently.

Interested in the subject? Check out other articles on the blog or contact us and see how DMT can help you and your company.

References

IBRAM
IN The Mine
Investing
InfoMoney
Your Money
XP Investimentos
The Cap Portal
Invest News

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