What’s the opposite of a tech stock?
I know, it’s a bit of a weird question. But if you had to pick a sector that was at the other end of the spectrum from the technology stocks, I think it’s fair to say that most people would pick the mining industry.
Mining is all about pick axes and brawn and ‘real’ stuff you can touch – not sitting in offices dealing with the ‘virtual’ world through a touchscreen. It’s about great big diggers, not teeny tiny smartphones.
Mining is low-tech. Tech is… well, high-tech.
But this might not be the case for much longer.
And that could open up some very interesting investment opportunities.
The big problem with miners
If you look at the way the technology and mining sectors have behaved in the last couple of decades, the market seems to reflect this idea that they are the polar opposite of each other.
Miners were among the most despised stocks during the tech boom. Then, the tech crash coincided with the start of the commodity bull market – as people ditched ‘virtual’ profits and embraced real assets.
More recently, as all the talk has turned to social media and other hot tech stocks again, the miners and the commodity sector have gone off the boil and become less popular.
And yet, some of the biggest trends in technology – drones, ‘big data’, automation – could be about to transform the mining sector. There was a really interesting piece in the FT yesterday, looking at how miners are starting to use the ‘internet of things’ to make their operations more efficient.
We’ll get on to that in a moment. First, let’s just outline the big problem the miners have faced in the past – their operations are extremely cyclical. To cut a long story short, when prices are low, nobody digs stuff out of the ground. As a result, you eventually run out of stuff, and the price goes up.
As the price goes up, more and more people dig more and more stuff out of the ground. They stop caring how much it costs to do this, because they start to believe that the price of stuff is always going to go up.
But eventually, there’s more than enough stuff. And the price falls again.
The biggest problem here – and the prime reason that mining is so cyclical – is the huge lag between prices changing, and behaviour changing. It takes a really long time to get a mine up and running. So, reacting in a timely fashion to changes in supply and demand is very difficult.
But the other problem is that efficiency goes out of the window during the boom times. Everyone is clamouring for staff, equipment, and resources. Costs soar, offsetting the benefits of rising commodity prices.
What would really help – from an investment point of view – is if miners could boost productivity and profitability from the mines they already have in production.
And this is where the ‘internet of things’ comes in. As one mining expert tells the FT’s James Wilson, “there is enormous slack in many mining systems. The industry has not been run with manufacturing discipline”.
Underground fibre optic cables and wifi networks allow miners to communicate and monitor productivity more efficiently. Big data analysis and collection allows them to get to grips quickly with both the quality of ore and how it should be processed. Meanwhile, automating vehicles cuts costs.
In short, it’s all about building better mines – exactly like building a better factory, or even a better online business model.
A new ‘picks and shovels’ play on the mining sector
One piece of good news to take from this is that it’s another sign that miners are getting a grip. That’s one reason why we think that, after a tough few years, you should be buying into the sector again. We started buying back into the sector a while ago – you can read a range of ideas on how to invest via individual stocks and funds in this piece from last year.
However, this shift also throws up some interesting investment opportunities in other areas. Back in the days when everyone was talking about the commodity supercycle, the smart way to invest in mining was to buy ‘picks and shovels’ stocks. That is, the companies supplying the gear that miners needed.
So, you’d be looking at conveyor belt suppliers or companies that sold the massive tyres needed for the miners’ monster trucks. Those sorts of companies might not do quite as well these days if miners are being more sensible and efficient about their use of kit.
But the companies that can help them to be more efficient – those that help them to analyse big data, or that can produce drones and self-driving trucks – look set to gain a significant new source of customers.
We’ll be looking at this topic in more detail in an upcoming issue of MoneyWeek magazine. If you’re not already a subscriber, get your first three issues free here.
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