With Commodity Prices Booming, Few Mining Stocks Look Cheap

Key Takeaways

• Booming commodity prices, led by gold, copper, and aluminum, are above our longer-term assumptions.
• Mining stock valuations are elevated overall, but we see a few areas of relative undervaluation.
• Gold prices remain elevated despite pulling back due to the Iran war.

With the Iran war dramatically reducing liquefied natural gas shipments from the Middle East, thermal coal prices have risen 23% as countries in Southeast Asia switch to coal from gas to meet their energy needs. The war has also disrupted aluminum production in the region, and the price of the metal is up 13% since last quarter.

Lithium continues to recover from its recent cyclical downturn on rising demand as supply growth stalls. Iron ore has risen modestly over the quarter, as strong China imports more than offset lower steel production.

The price of copper is broadly flat, trading at about $6 per pound, near historical highs. The epic gold bull market has also taken a breather, with the price broadly unchanged. Gold has more than doubled since the start of 2024. By contrast, metallurgical coal is down 8%, as tepid demand more than offsets supply disruptions due to inclement weather in Queensland. Most major mined commodity prices are elevated compared with the past and the cost curve.

Strong Commodity Prices and Balance Sheets Support Growth

Balance sheets are generally strong, led by gold companies amid an incredible gold bull market in recent years. Some lithium companies are highly leveraged due to the recent cyclical downturn, but we think stronger lithium prices will let them deleverage quickly. We expect Iluka’s ILU mineral sands business net debt to fall as demand and prices recover.

Returning capital is a priority. But we view procyclical buybacks at gold companies as value-destructive and prefer that they further raise dividends. High prices are also encouraging miners to chase growth. Merger and acquisition activity is up, especially in copper and gold, with prices near historical highs. Companies exposed to these commodities are also accelerating investment to increase production organically.

By contrast, Barrick B intends to undertake an IPO of its gold mines in Nevada and the Dominican Republic, selling a 10%-15% stake in the offering. This suggests that management believes the price of gold is materially elevated, consistent with our view.

Decarbonization and Electrification Driving Miners’ Investment Decisions

Environmental, social, and governance considerations have led the major miners (except for Glencore) to generally reduce their exposure to metallurgical coal, following a similar trend with thermal coal in recent years. Driven by expectations of demand growth for copper, nickel, and lithium from decarbonization and electrification, many miners of these commodities are boosting production by extending or expanding existing mines. Iron ore miners’ view that China’s steel production and seaborne iron ore demand will likely moderate (which we agree with) supports this trend both organically and inorganically.

Inflation is also increasing the cost of these developments, so capital and exploration expenditures are up. As these extensions or expansions pass their peak build phases, development capital expenditure is likely to reduce. However, stay-in-business capital expenditure is likely to be higher than in recent years, as costs have been rebased.

Mining Shares Are Very Expensive on Average

The unweighted average price/fair value estimate is slightly lower at 1.46, compared with 1.52 last quarter, driven by strong commodity prices for gold, rare earths, base metals, and lithium miners. Lithium miner Albemarle ALB and coal miner Whitehaven Coal WHC are the cheapest. Mineral sands miner Iluka is also modestly undervalued as the cyclical downturn in the space shows signs of improvement. Mineral Resources’ MIN shares trade moderately below their fair value as the firm benefits from rising iron ore volumes and lithium prices.

Gold Off Highs, But Still Elevated

Spot gold currently trades 15% below its historical highs after falling in response to the Iran war. Yet it is still elevated on strong investment demand due to concerns over tariffs, Western governments’ deteriorating fiscal balances, geopolitical tensions, a weaker US dollar, and falling real interest rates. Lower real interest rates are bullish for gold, reducing the opportunity cost for investors to hold it.

While jewelry is the biggest source of gold demand, ETFs tend to be the marginal buyers and often the key drivers of near-term prices, since they are also usually procyclical. While irregular, central banks’ purchases are trending lower but still elevated. This may continue as they diversify reserves while regaining control of inflation.

Elevated prices likely lead to increased supply. Recycled supply is rising while closed mines are being brought back online. Mined supply is also likely to rise on new developments.

A Few Mining Stocks Look Modestly Undervalued

• Whitehaven Coal: Rising thermal coal prices due to customers in Southeast Asia switching from gas to coal in response to disruptions to LNG supply from the Iran war are bullish for no-moat Whitehaven. Shares are around 15% undervalued. New thermal and metallurgical coal supply is restrained, affected by ESG concerns and opposition from regulators, which could bring longer-term price upside. We think demand for metallurgical coal is likely to be resilient, while demand for high-quality thermal coal is also likely to be strong for at least the next decade, especially from Southeast Asia.
• Albemarle: Narrow-moat Albemarle shares are slightly undervalued. Lithium prices rose as demand outpaced supply over 2025 and into 2026. As demand growth remains strong and global supply growth slows, we expect the market to remain closer to balance in 2026. We forecast long-term lithium prices of $20,000 per metric ton. Albemarle should also benefit from falling unit cash costs as production increases in the coming years, as well as capital expenditure reductions as it delays growth projects in response to low lithium prices. Given Albemarle’s low-cost position, the company should benefit from higher prices.
• Mineral Resources: No-moat Mineral Resources’ shares trade at about 10% below fair value. We expect earnings to rise as its lower-cost, long-life Onslow iron ore mine ramps up, and also due to higher lithium prices. Along with moderating capital expenditure, we forecast cash flow to significantly improve, likely leading to a dramatic reduction in financial leverage. Including the receipt of proceeds from selling 30% of its half share in Wodgina and Mt Marion to POSCO, we project net debt/EBITDA of 1.5 by the end of fiscal 2026.
• Iluka Resources: Shares are modestly undervalued after rising due to the cyclical downturn in mineral sands showing signs of improvement and an improving balance sheet as it draws down inventory, lowers operating costs, and reduces capital expenditure by keeping various operations on care and maintenance. Structural challenges for high-quality zircon and titanium dioxide feedstocks support prices in the longer term. Competitors Lynas and MP Materials are inking price floor agreements as part of the West’s attempts to reduce its dependence on China for rare earths. This bodes well for its refinery being constructed at Eneabba.