Investing in small cap mining services firms is not for the faint hearted given their exposure to the commodities cycle. But with the sector down around 40 per cent year to date (vs Small Ords down 23 per cent), and most major miners continuing to produce, we see value as attractive for the risk. There are four companies we particularly like.
We have recently taken advantage of depressed valuations and selectively added to our small cap mining services exposure. While this is a cyclical sector, the risk-reward profile appears better than prevailing share prices would otherwise suggest.
Mining has been designated an essential service in Australia (coal and iron ore royalties have perhaps never been more important for the Government’s ailing coffers) with production and development activity largely uninterrupted to date. This indicates near-term earnings for mining services companies may prove stronger than initially feared. Notwithstanding the less certain medium-term demand picture for commodities in a COVID-19 impacted world, fixed asset investment has historically played a central role in fiscal stimulus policies which potentially underpins a relatively solid mining services outlook.
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