After a stellar two-year run that saw the ASX 300 Metals & Mining Index more than double, it has slipped by 10% in 3 months as trade tensions and China data hit sentiment. So, is this the beginning of the end for the current cycle, or it is just another speed bump along the way? In this week’s Thematic Discussion, Ben Clark from TMS Capital hosts Romano Sala Tenna from Katana Asset Management and Michael Wayne  from Medallion Financial. Tune in to hear them sort the ore from the waste as they discuss where we are in the cycle, what they are looking for this results season, and some themes and stocks they think still present opportunities.  

Where are we in the cycle?

Romano Sala Tenna: We have seen some consolidation lately. We try and look at what the demand supply profile looks like for each sector. We then try and look at whether the analysts are ahead or behind the curve. I think most analysts at the moment are behind the curve, so we're likely to see upgrades still come through. So for us, that puts us in a good position for buying stocks in that sector. 

Michael Wayne: We saw a big run-up over the last couple of years, but the heat has started to come out. We've seen iron ore and copper start to pull back, and that obviously affects some of the bigger players. There are also question marks over China, and whether the same stimulus is going to come through in the next 6-12 months that was there 12 -18 months ago. So given where we are at the moment with prices, given where we are with the US dollar, we're pretty sanguine and think we're probably mid to late-cycle. 

What to look for in results 

Michael Wayne:  A lot of people say when it comes to commodity companies you're meant to sort of buy them on a high PE and you sell them on a low PE. When we look at these businesses, we're looking at the balance sheet. We're looking to see how much debt is on the balance sheet, whether there's enough cashflow coming through to pay off that debt. In Australia, a lot of the mining companies have really repaired their balance sheets in recent times. 

There's going to be a lot of cash paid back to shareholders. The question is whether or not the same amounts of cashflow are going to be delivered going forward, and also what are these companies going to do with their cashflow? Are they going to go out and make large scale acquisitions, or are they going to be a bit more conservative and return that cash back to shareholders. 

The word on the street at Diggers ‘n Dealers conference 

Romano Sala Tenna: Certainly Diggers is a forum where you can discover really great new ideas. This year surprisingly there wasn't really any major new companies broken as such, so it was really about the existing performers in past years presenting and confirming what they're doing. There was less hype in terms of the EV space, which we're still very bullish on. Also there was a larger number of offshore fund managers down here looking at our gold space. One of the big thematics emerging is that the Australian gold space has performed much better than our Northern American counterparts. So we're starting to see a lot more respect built in there. The sector as a whole was very flush with cash. The question is how do they go about now utilising that. They're very, very focused on making sure they don't just waste that money. 

Some sectors and stocks to look at 

Romano Sala Tenna: There's probably two areas to look at. I think certainly the EV space has pulled back. The lithium price has pulled back, cobalt's pulled back, the whole complex there. So it's one of the view areas that we can say, we can shut our screen off and come back in two, five, 10, 15 years and expect the demand to be substantially higher than it is today and therefore the pricing will be substantially higher. So we're doing a lot of work, we're rebuilding our trading positions in the EV space at the moment. We're also actually looking to add to our core holdings if the prices pull back much more. I think something like Mineral Resources (MIN) is a standout for what they're doing with lithium hydroxide. 

Probably a second area that we really like and have liked long term is energy, and in particular LNG. I think everyone's misread how quickly China has been able to build the infrastructure to accept and import LNG cargoes as they become available. Woodside's (WPL) a bit of a standout there because they've got the best growth profile for an Aussie energy stock that we're following in the LNG space. 

Michael Wayne: We don't mind the Australian gold space that was touched upon just then. Basically we prefer the Australian gold players that produce here domestically, that way they incur their cost in Australian dollars and they're selling their gold in US dollars. So an environment like we've seen where the Aussie dollar has come back from 80 cents towards sort of 72 cents I think is a really big tail wind. So your quality players such as your Northern Star (NST), your Evolution Mining (EVN) with high grade assets, long mine life, and low cost of production are probably the area we're looking for at the moment. 

When we're looking at the energy space at the moment, we're not confident that OPEC is going to maintain the production cuts that we've seen over the last couple of years, and that goes to Russia as well. Basically all the production that's come out of the market has been replaced by the US shale oil. So for us, that space is a little bit uncertain and we're far less confident about the outlook for the oil price than we are for the Australian dollar gold price. 

The view on mining services         

Michael Wayne: We think that the mining services sector's probably mid to late-cycle along with the broader commodities space. Contracts are going to be harder to come by. But we like to differentiate the sector into two parts:   

• The ones that are involved in the capital expenditure projects (the large developments of mines and building of the infrastructure).
• Then you have those mining services companies that are involved in more operating expenses and just running these mines at a steady state. 

So you think about something like Austin Engineering (ANG), or a McMahon Holdings (MAH), they provide parts to a lot of these miners and services to a lot of these miners and engineering services et cetera. So given where we are in the cycle, given that we're unlikely to see a repeat of the commodities super cycle from five, 10 years ago, I think many of these mines will start to operate at a steady state. You want to be involved in those mining services businesses that help these mines continue to operate, as opposed to expand. 

Romano Sala Tenna: I think firstly the mining services side is a very difficult and challenging area, as Michael has pointed out there. I think they're prone to irrational behaviours, there’s low barriers to entry, they take a lot of risk in terms of the pricing jobs et cetera, it's highly cyclical. So it's generally an area that we do avoid on the whole. Mineral Resources (MIN) does however have a unique combination of both, because just under half of their EBITDA comes from high margin, long-life, crushing contracts. They're embedded in the heart of a client, so it's very unlikely they're going to be kicked offsite. So that's certainly one that we do like in the mining services space.