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Resource markets are still searching for direction, and despite some evidence of improved sentiment, the resource sector remains generally unloved at present. This is reflected in the ASX Metals & Mining Sector P/E ratio (graphic attached), which has fallen from a high of 22.3 to a current low of 10.1. Over the past three years the average has been 14.5. Whilst the P/E ratio is just one measure of sector health, it is a useful one, and there are a few possible takeaways.
Firstly, the declining P/E could be a reflection of the market anticipating a downturn in earnings, with prices yet to fully adjust. This is not surprising, given last year’s record earnings on the back of record commodity prices, especially iron ore. The fall in P/E could also be representative of a more transitory shift out of the resource sector and cyclical stocks generally, as a defensive measure. What’s also interesting is that since early 2021, overall resource sector market capitalisation has closely tracked industry revenues, rather than profitability. Profitability is still well ahead, which suggests that either profits will decline in the future, or that company values will increase once again.
Significant news for Australia’s burgeoning Sulphate of Potash (SOP) sector this week, which has unfortunately seen a number of false-starts over recent years due to operational issues. One of the sector’s pioneering companies, Kalium Lakes (ASX: KLL), has sold its first batch of SOP from its Beyondie mine in Western Australia to local fertiliser manufacturer and distributor CSBP Fertilisers.
It’s happening at the right time too, as the SOP market has seen prices double from their long-term average over the last 12 months, largely instigated by economic and financial sanctions on Belarus and Russia, which together account for more than 35 per cent of the global muriate of potash (MOP) market. The attached graphic shows the increasing demand for fertiliser.
SOP is a sleeper sector that’s been relatively unloved over recent years due to the poor performance of ASX-listed equities, but this could be changing.
The oil sector is continuing to outperform most other sectors, and crude prices are continuing to show resilience. he supply side remains constrained, despite some concerns over demand. OPEC+ has agreed raise its oil output goal by just 100kbpd, which is less than anticipated and equivalent to just 0.1% of global demand. Not surprisingly, US emergency crude stockpiles are at a 37-year low.
Despite a challenging operating environment due to cost inflation and margin pressures, the latest round of quarterly production reports from our gold sector does highlight that there are companies out there defying the gloom, and registering strong operating margins.
One such company is Capricorn Metals (ASX: CMM), with an All-in Sustaining Cost (AISC) at its Karlawinda project in WA that’s amongst the lowest in the Australian gold industry. The price graphic reflects the market’s recognition of its production achievements. CMM also possesses significant corporate appeal in an environment where gold sector deal-making is almost certain to increase. CMM has significantly outperformed the gold price.