Reece Birtles is an Australian fund manager with three decades of experience.
He just released a paper examining the shifting dynamics of the Australian stock market, with a focus on the recent reporting season.
As he puts it:
“Company results allow us to compare expectations with reality, assess where earnings are moving, and hear directly from management teams about the opportunities and challenges ahead.
“But just as importantly, they allow us to observe how the market responds when new fundamental information arrives.”
Birtles’ analysis suggests that the stock market is moving away from placing a premium on capital-light technology companies with large addressable markets and pricing power. This is partly because AI is threatening some of these business models.
Instead, there is a shift towards companies with physical assets that are difficult to replicate or have high replacement costs. They also need to be able to turn this advantage into free cash flow.
The analysis also found that the domestic Australian economy is delivering anaemic earnings growth, while the resources industry — including producing miners and mining services providers — has a stronger tailwind from rising commodity prices.
This is made clear in the chart below.
Birtles adds that where resource companies underperformed, it was generally because of company-specific factors such as Northern Star Resources’ (ASX:NST) operational difficulties.
Of all the ASX sectors, the resources sector seems to be the biggest beneficiary as this new ASX ‘regime’ forms.
Miners, of course, by nature have irreproducible assets — their deposits are geologically unique in one way or another.
Operating mines also require significant investment in infrastructure to extract and transport ore to market. Miners are also exposed to global markets rather than Australia’s struggling domestic economy.
AI moves from buzzword to bottom-line gains
The Birtles paper also notes that AI is playing an increasing role in setting share prices. But it’s not enough for management teams to pay lip service to AI by simply mentioning it on an earnings call.
The market wants to see evidence of genuine productivity improvements or higher revenue growth.
An analyst at Stansberry Research recently noted that BHP Group (ASX:BHP) is using AI in a measurable way. For example, the company used AI to reduce crusher downtime across its iron ore operations, adding 1 million tonnes of production per year.
AI has also helped BHP’s Escondida mine in Chile save 3 billion litres of water since 2022, along with 118 gigawatt hours of electricity. These are significant cost savings that compound over time.
Stansberry adds:
“BHP is also using AI to build ‘digital twins’, or replicas of its mining operations and port systems. In this way, engineers can test different mine plans, ore blends, equipment schedules, and weather disruptions in the digital model before ever making changes to real operations. This helps engineers optimise mines and find problems earlier.”
Miners optimising their operations with AI will remain an ongoing theme for years to come. This could help resource companies offset higher costs in today’s inflationary environment.
If strong commodity prices persist, the resources sector could continue to outperform the broader market.
Write to Callum Newman at Mining.com.au
Main image: Unsplash
