Is Now a Good Time to Invest in ASX Mining Stocks?

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Mining in Australia is a big business. The Australian Bureau of Statistics reports that the industry employs more than 300,000 people, and the Minerals Council of Australia says the industry represents 21 percent of the country’s GDP output.

During the 2021/2022 fiscal year, the sector accounted for AU$413 billion in exports — 69 percent of Australia’s total export revenue. Unsurprisingly, the country is a top global producer of many metals, including lithium, iron ore and bauxite, which is the primary source of alumina. Australia is also a well-known producer of gold, with its outsized industry coming in second only to China; it ranks among the top producers in the world for zinc, nickel and cobalt as well.

But is now a good time to invest in ASX mining stocks? Read on for an overview of the country’s mining industry.

What’s the history of mining in Australia?

Exploiting the value locked in the land has been part of Australia’s economy since prehistory. Starting as far back as 40,000 years ago, Australia’s Indigenous populations mined the country for commodities like ochre and stone. Much like today, they sought high-quality deposits and traded the materials they gathered across the continent.

These early mines were largely open cut, but evidence at South Australia’s Koonalda Cave indicates that flint mines extended 75 metres below the surface and 300 metres from the entrance. The flint was mined in total darkness, then taken elsewhere to be turned into tools. Basalt, greenstone, obsidian and granite were mined across 416 sites in Eastern Australia.

The roots of modern-day mining in Australia can be traced back to the 1790s, when coal was discovered by escaped convicts William and Mary Bryant near what is believed to be Glenrock Lagoon in New South Wales. The find was later confirmed by Lieutenant John Shortland in 1797, and mining began in the following years with the use of convict labour. The first export of coal from Australia happened in 1801, with the shipment bound for India.

Over the next few decades, further deposits were found. Lead mining started in 1841, making it the first metallic mineral to be mined in Australia; it was followed shortly by copper in 1844. However, it was gold that captured everyone’s attention.

The yellow metal was first discovered in Australia in 1823 by James McBrien near Bathurst, New South Wales. However, because of the country’s status as a penal colony, the government suppressed news of gold being discovered in the country. It wasn’t until 1848, when the California gold rush began, that Australia’s government began offering rewards for the discovery of gold.

Australia’s first gold rush began in 1851 after Edward Hargraves found the metal at Ophir, near the town of Orange, New South Wales. Gold fever spread, and by the end of the year people were arriving from around the world in pursuit of the fortune brought by the yellow metal. The rush caused Australia’s population to grow from just 430,000 in 1851 to 1.7 million in 1871.

Today, it’s iron ore that’s driving the mining industry in Australia, although since the middle of the 20th century there have been discoveries of critical resources like lithium.

Iron ore in Australia

Iron, which is used to make steel, is broadly needed across the construction and manufacturing industries, and is also a key component in the production of renewable energy infrastructure such as wind turbines.

Australia is the world’s top producer of iron, although most of it is exported to China to be made into steel. More than 880,000 tonnes were extracted in the 2021/2022 fiscal period, making it the country’s top commodity and bringing in AU$133 billion.

Iron ore prices fell to around US$100 per tonne between April and August of this year, far below their 2021 all-time high of US$215.50; however, they were above US$125 by November. Demand for the metal had been expected to decline following China’s real estate crash, but as steel mills begin to shore up low inventories, prices have stabilised. This caused JPMorgan Chase (NYSE:JPM) to upgrade its outlook on Rio Tinto (ASX:RIO,NYSE:RIO,LSE:RIO), a major Australian iron producer, in September.

In the short and medium term, demand for iron is projected to decline in the coming years. Even so, its wide usage will cause it to remain an important part of the Australian mining sector, and there are several major mines in various stages of development.

Three are currently in the construction phase: the Onslow project, owned by Mineral Resources (ASX:MIN,OTC Pink:MALRF), China Baowu Steel (SHA:60019), AMCI Investments and POSCO (NYSE:PKX,KRX:005490); the Iron Bridge magnetite project owned by Fortescue Metals (ASX:FMG,OTCQX:FSUGY) and subsidiaries of Baowu and Formosa Plastics Group (TPE:1301); and the Jimblebar expansion project owned by BHP (ASX:BHP,NYSE:BHP), Itochu (OTC Pink:ITOCF,TSE:8001) and Mitsui & Co. (TSE:8301).

Lithium in Australia

Australia is the top producer of lithium in the world. In 2022, the country produced 61,000 tonnes of the battery metal — nearly half the global production of 130,000 tonnes — and it holds 6.2 million tonnes in identified mineral reserves.

The nation is host to several major hard-rock lithium mines, including Greenbushes, which opened in 1983 and is the largest lithium mine in the world. The mine is owned and operated by Talison Lithium, whose ownership is complicated. Talison is 51 percent owned by Tianqi Lithium Energy, a joint venture between Australia’s IGO (ASX:IGO,OTC Pink:IPDGF) and China’s Tianqi Lithium (OTC Pink:TQLCF,SZSE:002466,HKEX:9696), and the other 49 percent of Talison is owned by Albemarle (NYSE:ALB).

Two of the other large operations in the country are Mount Marion, owned by Mineral Resources (ASX:MIN,OTC Pink:MALRF) and Ganfeng Lithium (OTC Pink:GNENF,SZSE:002460,HKEX:1772), and Pilgangoora, owned by Pilbara Minerals (ASX:PLS,OTC Pink:PILBF).

Although Australia is the largest producer of lithium, 98 percent of the material is shipped to China for processing. To help strengthen its domestic supply chain, the Australian government is working to increase its refining capacity via grants and subsidies. One such example is the Modern Manufacturing Initiative, through which companies such as Core Lithium (ASX:CXO,OTC Pink:CXOXF), Calix (ASX:CXL) and Pilbara Minerals have received grants to fund refining facilities.

Lithium exports contributed around AU$4.9 billion to Australia’s economy in the 2021/2022 period, and because of its use in batteries for electronics and electric vehicles, demand is expected to rise. The coming years will see the need for lithium continue to grow as an increasing number of nations set deadlines to end the sale of internal combustion engine vehicles. Capturing the entirety of the production chain will not only add value to the Australian economy, but will also improve sovereignty over what is quickly becoming a strategic metal.

Bauxite and alumina in Australia

Australia is the world’s largest supplier of the mineral bauxite. Bauxite is the most economically viable source of alumina, from which the metal aluminium is produced. The country produced 100 million tonnes of bauxite in 2022 — just under a quarter of the global supply — and exported AU$15 billion worth of bauxite, alumina and aluminium combined in the 2021/2022 period.

With its relatively low weight, the need for aluminium is expected to grow in the coming years as automakers use the metal to counter the additional weight of batteries in electric vehicles. It may also find use as a substitute in conductive wire as demand for copper is expected to drastically outstrip supply by 2030.

High bauxite grades and shallow depths have made Australia attractive for exploration and mining activities. It is home to six large mines: the Weipa and Gove mines controlled by Rio Tinto, the Huntly and Willowdale mines owned by Alcoa (NYSE:AA), the Boddington mine owned by South32 (ASX:S32,OTC Pink:SHTLF) and the Bauxite Hills mine, which is controlled by Metro Mining (ASX:MMI,OTC Pink:MMILF), the country’s only listed pure-play bauxite company.

Unlike the iron ore supply chain, the majority of bauxite is processed and upgraded into alumina and aluminium in Australia, which is home to six refiners and four smelters. The primary companies proving alumina and aluminium are Alcoa and Rio Tinto.

Gold in Australia

Australia is one of the largest producers of the gold in the world, churning out 320 tonnes in 2022 and sitting on the world’s largest mineral reserves at 8,400 tonnes. Gold is also the country’s third most important mining product by value, bringing in AU$23.2 billion during the 2021/2022 period.

The gold price has been strong since the start of the pandemic, staying above US$1,600 per ounce and peaking above US$2,000. These historically high prices have fuelled a new gold rush, with mining expansion projects and fresh exploration globally.

There are many gold mines operating in Australia. Evolution Mining (ASX:EVN,OTC Pink:CAHPF) is currently expanding its Mungari gold mine, which will extend the mine’s life to at least 2038 and will push production to over 200,000 ounces per year.

As for exploration-stage projects, a promising discovery by Spartan Resources (ASX:SPR,OTC Pink:GYYSF) is the high-grade Never Never target at the company’s Dalgaranga mine in Western Australia. The untapped deposit, currently in the exploration phase, has consistently delivered good testing results.

What does the future hold for gold in Australia? While it can be expected to be a main contributor to the country’s mining sector, high volatility from rising interest rates and geopolitical instability are pulling investor interest in separate directions.

Uranium in Australia

Another resource that is becoming increasingly important globally is uranium. According to the World Nuclear Association, Australia is the fourth largest producer of uranium, mining 4,553 tonnes in 2022.

The need for fissionable material for use in nuclear power plants is steadily growing as more of the world transitions away from fossil fuels and toward clean alternatives. Despite some high-profile accidents, third and upcoming fourth generation reactors address many of the safety issues with previous generations. Reactors like the CANDU series have been deployed globally, and new small modular reactors are under development to provide greater flexibility for long-term upgrades and regional use.

Additionally, radioisotopes from uranium have uses throughout the medical sector for diagnosis and research, as well as in farming to prevent the sprouting of harvested crops and control parasites.

With 23 percent of the world’s mineral reserves, Australia has the most uranium of any country. In 2022, the nation delivered more than AU$500 million worth of the ore to market. Currently there are three uranium mines operating in Australia: the Ranger mine, owned by Rio Tinto and the Australian government, the Olympic Dam mine, owned by BHP, and the Beverly and Four Mile deposits, owned by Heathgate Resources.

Is now a good time to invest in ASX mining stocks?

The market has been good for resource investors in the past few years, with S&P/ASX 300 metals and mining sector companies outperforming the broader S&P/ASX 300 (INDEXASX:XKO) over the last three years.

Specifically, the metals and mining segment has seen 9.21 percent growth since January 2021 compared to 4.94 percent growth for the S&P/ASX 300 during that same time. However, both have seen declines through the 2023 calendar year, with mining stocks losing slightly more than the S&P/ASX 300 overall.

With a big push to decarbonise national economies and transition away from fossil fuels, commodities like copper, lithium and uranium are expected to be in high demand. This could be good news for producers of both energy minerals and base metals like Rio Tinto. However, with fewer mines being built, especially for copper, there is going to be a greater need for exploration and development going forward, which puts more emphasis on the junior companies working to discover economic deposits.

Gold has largely held strong since the pandemic, and spiked to near record highs earlier this year following the US banking crisis. However, with the US Federal Reserve raising interest rates to combat inflation, the gold price has been put under pressure. Safe-haven demand spurred by the Israel-Hamas war has more recently provided support.

Base metals typically don’t react the same way to geopolitical forces as gold, as they’re more dependent on market demand from large sectors like the automobile and real estate development markets. As a result, many base metals have seen declining prices as supply is currently greater than demand. However, the expectation is that metals like copper and aluminium will see their markets grow before the end of the decade.

Many analysts believe the mining sector is undervalued, and that the time is right to find good opportunities. Investors should weigh their individual risk as market forces are often dictated by a few large economies and can change the landscape quickly.

Securities Disclosure: I, Dean Belder, currently hold no direct investment interest in any company mentioned in this article.

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