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"Valuation for the mining industry is a strong predictor of future return. For any long term investor, the implications are clear; mining will deliver significant outperformance relative to the broader market," said Bernstein analyst and report author Paul Gait.
Bernstein's analysis suggested investors in mining companies could expect to see their investment outperform the market by 14% annually, compared against a typical S&P tracker fund.
"The mining industry has never been cheaper," said Gait. "On a relative basis, the mining industry is trading at 1.4 standard deviations below long run average value; this is the lowest point recorded in the data set."
The industry stands at the 95th percentile of its historic valuation range. A reversion to the mean is almost inevitable, Bernstein concluded in the report, titled Metals & Mining: Mining versus the Market...Dimensioning the expected outperformance.
Today's valuations mean that the mining sector is priced 60% below its true value, compared with other listed companies' capital expenditure versus their valuations. Even if just looking at mining companies, this figure is 30% compared to the historic norm.
Since project lead times and capital intensity are both increasing, Bernstein said the next cycle would be even more amplified than the previous one.
"This outperformance should come as no real surprise, in the first place because, from a strategic perspective, mining is a structurally far more attractive industry than pretty much any other," said Gait.
"Whilst its products are, obviously enough, commodities, that is largely irrelevant as a consideration. What are not commodities, however, are the assets that underpin production. Smart phones are a commodity because the means of production can be copied, iron ore is not a commodity in that sense because there is absolutely no way - short of invading Australia - of replicating the Pilbara.
"Smart phones can be replicated, and the technology reverse engineered, copied or stolen - as the existence of Huawei testifies to - hence leading to a commoditisation of the means of production. No such possibility exists for iron ore or any other product of the mining industry. I would far rather trust the Ricardian rents on offer in mining than the Schumpeterian rents on offer in technology."
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Bernstein has said a reversion to the mean on mining companies' valuations is virtually inevitable
