A Look at the New Mining Services ETF
January 3rd at 9:09am by Tom Lydon
Investors who are interested in gaining exposure to companies that service the growing mining industry can take a look at the relatively new PureFunds ISE Mining Services ETF (NYSEArca: MSXX). The ETF is the first to exclusively invest in the mining services sector. It reflects the performance of the ISE Mining Service Index, which holds 30 global companies that operate across 6 continents.
As world economies grow and expand, the people and industries will require more raw materials. Investors have looked at miner exploration and production exchange traded funds as a way to play the expansion, but the services side could provide more stable growth.
“Service and E&P (exploration & production) companies are similarly exposed to the supply and demand of natural resources, but service and E&P companies have different business models, and the service business model could offer more predictability,” Paul Zimnisky, co-founder and CEO of PureFunds, wrote in a research note. [A New ETF for Diamonds and Gems]
“Service companies tend to produce revenue at the time they are providing the service at a pre-agreed upon rate,” Zimnisky said. “In this way, a service company’s cash flow tends to be more upfront and predictable than that of an E&P.”
At a miners conference earlier in 2012, Boar Longyear (ASX: BLY), the world’s biggest mineral exploration drilling company, stated that demand for its services and products has been expanding and the order backlog for both is on the rise.
In a recent report, SNL Metals Economic Group (SNL MEG) estimated that worldwide non-ferrous, or non-magnetic, metals exploration budget for 2012 hit an all-time high of $21.5 billion in 2012, or up 19% over 2011.
“Non-ferrous metal exploration budgets are at historic highs, which is very favorable for these companies,” Zimnisky said.
Since 2008 through the first half of 2012, metal prices have been on the rise, with copper up 263%, gold 224%, iron ore 204% and nickel 164%.
The mining services sector has also experienced greater consolidation as large players begin to expand into the area. In 2012, General Electric (NYSE: GE) announced that it will create the GE Mining unit, which will buy mining equipment and service companies. Capterpillar Inc (NYSE: CAT) is also expanding to mining ventures after purchasing equipment maker Bucyrus International last year for $8.8 billion.
For more information on miners, visit our metals & mining category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.