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Three things you probably weren’t expecting for our miners in 2018

Credit: iStock

The strength in mining stocks won’t come as much as a surprise to many as the positive outlook for the sector has been pretty well flagged.

But there are three themes that I think will emerge for our miners in 2018 that many investors have probably not caught on to – at least not yet.

These themes are worth keeping an eye on as they could well have an impact on how you approach investing in the sector, which is the only one trading in the black this afternoon.

In fact, its outperformance is one of the key characteristics of our market for 2017 with the S&P/ASX 300 Metal & Mining (Index:^AXMM) (ASX: XMM) index surging ahead over 21% when the All Ordinaries (Index:^AXAO) (ASX: XAO) is only ahead by about 6%.

I am expecting our miners to keep powering ahead of the broader market in 2018 and I think most investors are coming to that conclusion, if they haven’t already.

But there are three other themes that I think we will see for the sector in the year ahead that may surprise you.

The first is the increase in risk appetite among the big miners like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), who have so far been extremely fiscally conservative.

The boards of these resources giants have been playing it safe for the last year or two by focusing on cutting costs, increasing productivity and generating cash. They have essentially shied away from greenfield projects and acquisitions as they know they will face an investor backlash if they stuck their heads out.

But times are a ‘changing. Investors themselves are increasingly willing to up their risk ante and the prospect of more mega mergers and acquisitions (M&A) following the buyout of Westfield Corp Ltd (ASX: WFD) will likely prompt our favourite mining giants to take on more daring endeavours in 2018.

I am not saying they will abandon fiscal conservatism – just that we shouldn’t be surprised to see some M&A activity in the sector as well as the increase in expansion capex.

The second theme are consensus upgrades to the valuation of our miners. Commodity prices have surprised nearly all analysts for the good part of the year.

Most analysts have taken a bearish view on the medium-term outlook on metal prices and are only now playing catch up. Their forecasts for 2018 are still materially below the current spot prices, particularly as commodities have rallied hard over the past two or three weeks.

I believe commodity markets will hold up better than what many are expecting in 2018 and this means we should see some substantive upgrades for the sector in the coming months.

The third feature I am expecting for the sector in 2018 is the outperformance of second-tier miners, who have essentially been lagging far behind BHP and Rio Tinto.

The two giants will still do well next year but I think their smaller rivals will close the gap, and that means investors should be looking for greater exposure to this group.

The second-tier miners that could outperform include Independence Group NL (ASX: IGO) and OZ Minerals Limited (ASX: OZL).

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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