[miningmx.com] — “THE bazooka is loaded: it may not have to be fired.’
Anytime that you can work the word “bazooka’ into a story, you’re likely to get the
traders excited, and this killer quote from Investec strategist Brian Kantor highlights
exactly why the commodities sector is such fun for punters at the moment.
Peter Armitage from Anchor Capital made an interesting observation this week when
he weighed up the performance of SA retail shares versus the resource index.
Overall, it has been a one-way bet for investors over the last few months. However,
the recent rebound in resource shares has got the traders interested.
“Portfolio managers are now faced with a critical question: is this a short-term
counter-trend bounce, or the start of a trend reversal? The view taken on that
question will make a huge difference to portfolio performance in coming months,’
says Armitage.
He points out that energy and agriculture resource counters have suffered for the last
year, while iron ore has also slumped significantly in the last few weeks, weighing on
those with heavy exposure to the sector. Importantly, if prices stay as low as they are
at the moment, analysts might need to start cutting their earnings forecasts by as
much as 50%.
So where does this leave the big “super resource’ plays that dominate the markets?
Perhaps the starting point is to look at the international analyst consensus and use
this as a starting point for some of these heavyweights.
According to FT.com analyst consensus forecast for Rio Tinto – London listing
– is that nine analysts have it as a “Buy’, 16 analysts have it as an “Outperform’
rating while two consider it a “Hold’. Closer to home, SBG Securities has the share as
a “Hold’ with a 12-month price target of 3,300p/share.
SBG raises two issues – namely the ability to fund the progressive dividend policy that
Rio Tinto has in place, considering its major capital expenditure programme and
concerns around the iron ore price.
Commenting on its 3,300p price target, SBG advised clients: “While this implies a 12-
month total potential return of 22%, we prefer to remain cautious in the short term,
seeing further potential downside risk while the market “discovers’ a new equilibrium
price for iron ore.’
One of the interesting options might actually be to look at the US listing of Rio Tinto.
Four of the analysts have offered 12-month price targets with the median being
$81.65, the highest being $95 and the lowest being $65.61. The median represents a
68% return for the 12 months.
The “baby’ of the bunch is Brazilian based Vale, which is listed on the NYSE and has
heavy exposure to iron ore and base metals. We include Vale because it does give
access to a BRIC enterprise that’s aggressively looking to grow its market share.
According to consulting firm Ernst & Young, Vale is building a 20-vessel fleet of 400
000-ton capacity for competitive iron ore exports to Asia.
This is part of a broader $24bn expansion plan that has, however, been crimped by
pressure on the iron ore market. Consensus forecasts suggest that Vale is pretty well-
priced, with analysts leaning toward a hold recommendation.
Median price target consensus suggests a 12-month return of 40%, definitely not as
attractive as Rio.
This leaves the likes of BHP Billiton and Anglo American for trader portfolios. BHP
trades on a forward earnings multiple of around nine times earnings while Anglo
American is nearer 11.3. Stockbrokerage Barnard Jacobs Mellet (BJM) says that it
prefers BHP Billiton because of its exposure to lower risk countries like Australia,
North America, Europe, Brazil and Chile. BHP has also been weaning itself off
exposure to SA businesses and has the benefits of oil assets thrown into the mix.
Ernst & Young points out that BHP Billiton engaged in a $10bn share buyback
programme last year, if one considers that the share has delivered roughly 12% year
to date, management sees value at the current levels. However, to the point Armitage
made, stockbrokerage Imara SP Reid says that if policy stimulus from the Federal
Reserve, the ECB/eurozone and Chinese government don’t come through, then
earnings could well dip.
The firm warns that BHP Billiton could revisit the lows of the year – R200/share.
Management has made a $10bn bet that commodities will recover – might be worth
backing it off these levels.
A point raised by Sasha Naryshkine from asset management firm Vestact is the better
earnings mix that will help it through the cycle. He told clients: “Iron ore is still the
champion, but less so than before. The petroleum division maintains that roughly
quarter contribution, which it has consistently done over time. Base metals, as you
can no doubt see, has been a smaller contributor, but this is not completely due to the
lower performance this year, but also in large part due to the outperformance of the
iron ore division.
“The other two major contributors are their coal assets. But this looks like better
diversification than their peers, we like the energy aspect.’
If you look at consensus forecasts for Anglo American versus BHP Billiton, more
analysts expect Anglo to underperform, while BHP has higher ratings.
In order of preference, it looks like BHP Billiton, Rio Tinto, Anglo American and Vale a
distant fourth in the short term.
Happy trading.
– Finweek
