Beware of resource stock overshoot

[miningmx.com] –THE recent 15% fall in the prices of resources shares, as measured by the Resources Index (J210), over the past few weeks shouldn’t only be attributed to the overly strong rand.

There may be more negative underlying factors of which investors should take account.

There are many opinions, so it’s a good idea to see what the consensus view of analysts is concerning the prospects for the various metals and minerals, as well as the investment merits of the various producers.

Each month Bill Matlack, of Scarsdale Equities, gives a handy summary of the consensus views of analysts as collected by Thomson One Analytics. Thomson Consensus Rating System allocates weights as follows: Buy (1,0), Buy/hold (2,0), Hold (3,0) Sell/hold (4,0) and Sell (5,0).

According to the model, prospective investors therefore only have to look at shares whose rating is preferably better than 2.0. (Incidentally, my favourite – British American Tobacco – currently has a rating of 1.2.)

Existing investors can still hold on to their shares, although the rating has weakened to 2,5. But anything weaker than that looks like a selling opportunity – or steer clear of them if you don’t have any.

Using Matlack’s comprehensive tables, with opinions about every producer of every kind of metal or mineral in the world, we have extracted the following ratings for shares that may be of interest to South African investors.

Share Rating

Kumba 3,3

Anglo American 2,2

BHP Billiton 2,3

Rio Tinto 2,1

Xstrata 2,2

Exxaro 2,9

Assore 4,0

AngloGold 2,6

Gold Fields 3,0

Harmony 2,7

DRD 4,0

Anglo Platinum 3,2

African Rainbow 2,3

Impala Platinum 2,6

Aquarius 2,9

Lonmin 2,9

Northam 2,4

Wesizwe 4,0

First Uranium 3,4

Uranium One 2,1

Admittedly, those are only analysts’ opinions – and they’re often wrong. But the trend is clear. The analysts and opinion makers are certainly no more optimistic than they were six months ago, or even three months ago. The fall in the prices of resources shares over the past few weeks confirms the fall in confidence very clearly.

Thompson also collects the opinions of analysts about the prospects for the prices of the various metals and minerals. There’s little reason for excitement there either. The table shows the consensus views don’t expect much further increase and even expect small declines by 2012.

The message is clear: Be careful and don’t be too easily misled by the current slightly more attractive prices at which, especially, the big guns on the JSE are trading.