Global mining equities tend to form one of the largest segments within global resources funds. We look at the global mining universe to see what an investment in the sector entails.

What’s in the global resources space?

Global Mining – A quick overview

Chart 1: A breakdown of the global mining sector

Chart 2: Gold performance

Gold mining companies form the next largest segment of the global mining equity universe. As the category suggests, these are companies involved in the extraction and production of gold from the ground. Intuitively, the fortunes of gold miners are tied to the performance of physical gold prices, since revenues (and hence profits) are dependent on gold prices. As Chart 2 shows, gold stocks and gold spot prices have been highly-correlated over the long term. As opposed to owning physical gold, an investment in gold mining companies entails business risk, although this also provides an opportunity for investors to benefit more, owing to the leveraged nature of gold miners’ exposure to gold prices. This has also meant that historically, gold mining companies have traded in a more volatile fashion compared to the price of physical gold. Some of the largest representative companies in this segment include Goldcorp, Barrick Gold and Newmont Mining, which are usually found amongst the top holdings of funds like the United Gold & General Fund. DWS Noor Prec Metals CL J SGD or the Blackrock World Gold Fund A2 USD which offer more targeted exposure to the gold mining sector.

Base Metal Miners

Also forming a significant proportion of the global mining universe is the category of base metal miners, which comprise mining companies which are more concentrated in their product focus compared to the “diversified miners” group. In addition to being more specialised in a particular metal (eg. Copper or Aluminum), base metal producers tend to be less diversified across the entire mining supply chain. As such, investors in base metal miners are generally more susceptible to the movements in specific commodity prices compared to their more diversified counterparts. Examples of companies in this segment include Freeport-McMoRan Copper & Gold (one of the largest producers of copper in the world) as well as the Aluminium Company of America (or Alcoa), one of the largest producers of aluminium.

Coal Producers/Others

Coal producers and other metal or mineral producers are the two smallest sub-components of the broader Euromoney Global Mining Index. Unlike the other sub-components which are dominated by companies in the developed markets (over 75% of the broad Euromoney Global Mining Index is made up of companies from the UK, Canada, Australia and the US), China has the largest representation within the Coal producer category, with China Shenhua Energy the largest company within this sector. This high representation is not surprising given that China is the world’s largest coal consumer — in 2010, the country consumed more than three times as much coal as the US, the world’s second-largest coal consumer. As shown in Chart 3, the US Energy Information Administration estimates that by 2040, China and India’s share of global coal consumption will rise from 55.6% (in 2010) to 65.5%. Like base metal miners whose profits are determined by the selling prices of specific base metals, the performances of coal miners tend to be highly correlated with coal prices. Chart 4 shows how the performance of the sector compares against the movements in various benchmark coal prices, with the coal mining sub-index presently trading near its 2009 lows on weakness in coal prices.