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Resources
The resources boom is over but gold, oil and coal seam gas stocks remain on buy lists
Jan McCallum - February 2, 2009
The shut downs and retrenchments in the mining business have shown that the resources boom is well and truly over but that doesn’t mean the sector is totally off limits for investors. They will, however, have to consider some different stocks.
Although few analysts are optimistic about the outlook for mining stocks or commodities this year, they can see a recovery after 2010 and in the meantime say there will be opportunities in gold, oil and coal seam gas, with attention shifting from coal, iron ore and industrial metals.
And what happened to Chinese resource demand, which was forecast to keep the recession from Australia’s door? Well, it will bounce back, but not to the extent of the past few years.
The ANZ Bank’s head of international economics research Amy Auster is forecasting a difficult six months for China as its economy is hit by domestic slow down and global factors.
“I think things will improve from around May or June but not bounce back extremely rapidly, the recovery will not be to what we experienced in 2006/07,” she says.
Auster says although China became a major source of new demand for Australian resources, China alone did not absorb them because its economy was integrated with the rest of the world and its manufacturers have been impacted by the manufacturing slowdown globally, the crisis in the auto sector and the credit crunch.
Resource demand is also being affected by a construction slump in China after the government introduced measures to curb the amount of money flooding into building high-end apartments. It has since wound these back, but it will take a few months to show to what extent the cranes are operating again. The Chinese new year holiday began on January 26, with industry and most businesses closing for the week, so there will be a seasonal impact on demand for resources in this quarter.
Wilson HTM senior resources analyst John Young says the outlook for resources is very good over the medium to long term as the global economy recovers and people in China and India pursue better lifestyles.
“We will see as these countries move from being agricultural economies to industrial and urban economies that demand for resources – energy and metals, will increase,” he says.
But Young warns the next few months, perhaps out to two years, will be difficult to gauge and will be tough for commodities.
EL & C Baillieu director Richard Morrow says many investors have abandoned the China story but he’s not one of them as the size of the economy and modernisation will once again drive commodity prices up, perhaps towards the end of this year. He says the best time to sell resources stocks is over but opportunities remain for those prepared to take an active strategy.
Morrow says resource stocks are for buying and selling “not holding and falling in love with” and BHP Billiton is a prime example. While it remains on some analysts’ buy lists, Morrow sees BHP is a selling opportunity because it has risen 50 per cent since its low in November.
“They are the best house in the street but you have to take a more aggressive view over the next two years on mining stocks as there is still an enormous amount of panic about the direction of the global economy and the share prices of resource stocks are driven by sentiment – and the sentiment is unmistakably edgy.”
Morrow is waiting for the repatriation of money back into the US to peter out, which will see the US dollar fall and the gold price rise. However, he acknowledges there is a limited choice of major producers in Australia and Lihir and Newcrest are trading at around 27 times earnings. Of the smaller companies, Morrow likes Avoca, which is producing from the Higginsville Gold Project in Western Australia.
He also remains keen on the coal seam gas story, still very much at the early development stage, and likes Origin among the majors and Molopo out of the smaller players. He also notes that the forward oil price is around US$58 for a year out. Morrow says Nexus Oil is “stupidly cheap.”
John Young sees the oil price remaining weak around current levels over 2009-10 on slower global growth. But he points out that many companies’ cost of production is significantly less than current oil prices of around US$40 a barrel.
“Companies that don’t have debt and don’t have significant capital commitments and that are producing will continue to generate reasonable amounts of cash.
“On top of that, many of these companies will be presented with investment opportunities by those that don’t have funding and need industry partners to help them develop projects.”
Wilson HTM is recommending AWE, a producer which is cashed up with no debt, and Molopo, which is focused on developing coal seam gas and shale gas. Young likes Molopo’s geographic spread and says the company recently got a good price for selling its interests in the NSW Gloucester Basin to AGL. “They were able to sell an asset they considered non-core to provide a significant amount of funding for developing their other projects.”
Miners will attract more attention over coming weeks as they release their quarterly production reports and a lot of it will be unfavorable as analysts focus on lower commodity prices and revenues. Investors will have to keep their time frame in mind when considering the sector and be prepared to actively follow their stocks.
More articles from this edition of CompareShares:
Resources: The resources boom is over but gold, oil and coal seam gas stocks remain on buy lists
Stocks: Broker Stock Recommendations 2 February – 6 to BUY, 6 to SELL and 6 to HOLD
Investing: Base metals prices have fallen so hard that the mining industry is now faced with a problem
Expert Panel: What does it mean to be positively or negatively geared with margin lending?
CFDs: Top ten CFDs for the week
Economic Outlook: Stocks & stats for the week
Recession: Australia heading for recession
Property: Home values 'dip eight per cent in 2008'
Rates: Rates set to fall in February
Economics: Business investment to fall sharply
Companies: Rio Tinto confirms Chincalco talks
Companies: Telstra quiet on new CEO search claims
Companies: Newcrest shares go into trading halt
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