Stagflation stock pick

Stagflation occurs when the growth of an economy slows down and unemployment increases while prices rise. An example would be during the 1970s when global oil prices reached a high of $12 from $3 a barrel, representing a 300% growth by March 1974. This had a ripple effect in the global economy.

Unlike inflation, where we simply refer to a rise in prices of products and services, with stagflation we look into factors such as demand-driven supply, the rise in cost of commodities – which may directly affect production costs of other industries while benefitting mining companies – and wage-price spiral theory that explains the relationship between higher salaries (labour) and higher prices. As geopolitical factors continue to take a toll on the global supply of commodities such as oil (as one of the core commodities that affects the economy) we look into companies that are thriving during this period

Uranium

Paladin Energy Ltd (PDN)

Is uranium taking the market spotlight as a conflict between Russia and Ukraine takes a toll on the global economy and the uranium market? As threats to ban uranium imports from Russia rise, for Paladin Energy, as a large-scale uranium production and exploration company, the escalation in political tension may create a conducive environment for the company. This comes after trading wallowed at an all-time low of around $0.20 per share since 2016. In 2021 the company experienced a rebound in its stock price, subsequent to a capital raise of AU$218.7 million. According to Paladin CEO, Ian Purdy:

“The successful completion of the equity raise represents a significant milestone in the transformation of Paladin and provides a ‘reset’ of the company’s balance sheet.

“Our improved balance sheet… enhances the company’s position as an attractive counterparty for utilities and other offtake partners.”

During the period no production was reported, as the company repositioned itself to restart the Langer Heinrich mine, a uranium mine in western Namibia. Purdy added that, “The workstreams reinforce our confidence in Langer Heinrich...

“As the world continues to move towards a decarbonised economy, Paladin is in a unique and enviable position of having a robust capital structure with no corporate debt and a project with a low-risk pathway to production with strong economics and, importantly, a well-known product from our 10 years of prior operation.”

Paladin Energy had a cash balance of US$38 million by December 2021 with no corporate debt.

As part of its social responsibilities, Paladin Energy spent US$1.6 million on local products and services in Namibia; the company had a 100% local workforce, with women accounting for 30% of employees.

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Gold

Perseus Mining Ltd (PRU)

Despite the volatility associated with gold during the times of uncertainties, with gold spot prices trading above the ten-year high as demand for the safe-haven increases, for Perseus Mining, a West African gold producer; the year started off on a positive note as the company’s three operations in West Africa (namely Yaouré and Sissingué in Côte d’Ivoire, and Edikan in Ghana) continue to deliver strong results.

By December 2021, during Perseus’ half-year, operations delivered a strong performance, growing revenue by 90% from the previous comparative period (PCP) to AU$545.7 million. EBITDA improved by 101% to AU$252.4 million; profit after tax was AU$126.9. The company’s operating cash flow during the half-year increased to AU$245.9 million. Gold reserved was during the period was 9,342 oz of gold valued at $23.4 million.

“Our financial results for the December 2021 half-year are indicative of our strong operating performance at all levels of our business during the period,” says the company.

“With three gold mines in operation, we are now producing gold at our targeted rate of approximately 500,000 ounces of gold per year, and with excellent drill results coming from our organic growth programmes we are confident of at least maintaining this level of production and associated profitability well into the future.”

Given the strong performance during the period, Perseus plans to produce more than 500 000 ounces of gold per year going forward. Speaking on responsible mining, the company said, “We believe – and are committed to demonstrating – that responsible gold mining can play a progressive role in the sustainable development of emerging economies, and deliver sustainable returns to our shareholders.

“Operating performance consistently in line with ESG KPIs.”

As the company grows and expands, ESG targets are among the company’s areas of focus. These include the empowerment of women, and providing opportunities for the local communities. Reporting on its 2021 ESG progress, the company said “At Perseus, we believe that women should be better represented within West Africa’s growing extractive industry, and are committed to empowering women in the sector and helping them further their socioeconomic potential.”

The company’s contribution to the countries it operates in was US$428 million. This includes 81% local procurement. The local workforce during the period was 95% of the overall employment.

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Informed decision

Aside from rising commodity prices, focusing on Africa, one of the major factors that may affect these companies may include labor-related factors. This may directly affect the capital expenditure (CAPEX) and operational cost. Depending on targets, a company may be able to reduce costs enabling CAPEX to be spent on other exploration opportunities, further creating value for investors in the long term.

Adding to the above, ESG targets related to women empowerment and opportunities for local communities are also amongst the factors that may contribute to the intangible assets that include branding along with costs, especially during this period wherein Africa, women and local community empowerment has been making headlines.

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Sources – EasyResearch, Perseus Mining Ltd, Paladin Energy Ltd, ASX.

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