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Australian Financial Review : October 17th 2006
FBA 022 The Australian Financial Review Tuesday 17 October 2006 www.afr.com 22 MARKET WRAP Nickel -- metal exchange star SHINING BRIGHT LME nickel and copper prices Source: Bloomberg Index 240 200 160 120 Jan Mar May Jul Sep Jubilee Mines Share price, daily $ Minara Resources Share price, daily $ 06 06 Mincor Resources Share price, daily $ 2007 price-earnings ratios for mining companies Nov May Aug Feb 06 Nickel (+122.6%) Copper (+65.9%) YTD return 180% 12mth return 221% YTD return 171% 12mth return 170% YTD return 54% 12mth return 72% Company P/E (x) Jubilee Mines Minara Resources Consolidated Minerals Oxiana Rio Tinto BHP Billiton Independence Group Sally Malay Mining Mincor Resources Zinifex 14 11 11 11 10 9 9 5 4 4 Jo Clarke Nickel has been the surprise star on the London Metal Exchange over the past four months, outperforming all other metals and forcing the share price of nickel miners up by at least 70 per cent since mid-June. Nickel is used in a growing stainless steel market, but supply has been unable to keep up with demand as a number of large projects, including BHP Billiton's Ravensthorpe project in Western Australia, have been delayed. This imbalance, made worse by disruptions to existing operations, implies the market will be in deficit until 2008, according to Goldman Sachs JBWere commodities analyst Malcolm Southwood. ''We understand that around 35,000 tonnes of global production has already been lost this year and discussions [at last week's LME week in London] have reinforced our view that a major turnaround is improbable next year,'' he said. The nickel price has increased 75 per cent since June 13 to about $US30,750 per tonne, a record high. A year ago, nickel was fetching $US12,500 a tonne. The rally in the past four months has been reflected in a 70 per cent jump in the share price of Australia's largest independent nickel miner, Jubilee Mines, to $11.60. This modest increase relative to others in the sector is because Jubilee started from a higher base. Minara Resources, which was always the underperformer because of the technical issues of its Murrin Murrin laterite plant, has surged 156 per cent since mid±June to $5.31 on improved operational performance. If it can produce another quarter in line with the record June quarter, it will start to convince the market it can provide consistent performance, according to Citigroup analyst Jonathan Battershill. ''We recommend buying shares in Minara as the production problems that have plagued the operation for so long appear to be receding,'' he said. ''The stock provides significant leverage to the nickel price with an unhedged production profile and a growing output.'' Macquarie Research is still concerned about Minara's production reliability. ''We think Minara remains expensive on most metrics, particularly against its Australian nickel peers,'' Macquarie analyst Lee Bowers said. Mr Bowers is more bullish on Independence Group, which operates the Long nickel mine in WA. The main upside for Independence comes from the Tropicana gold project, which joint- venture partner South African major AngloGold-Ashanti has touted as a multimillion ounce deposit. The junior also has exploration potential in nickel and its share price has soared 110 per cent in the past four months to $4.83. ''Independence boasts a solid production track record, excellent prospects of expanding [nickel] production and a robust pipeline of advanced exploration projects,'' Mr Bowers said. A strong growth story from Mincor Resources also has gone down well with investors, pushing the share price up 114 per cent since June to $1.75. Sally Malay Mining has not run as hard as its peers, up just 70 per cent in the same period to $1.65. It does not have the ambitious growth plans of its neighbours and has a mine life of just four years, but is focused on exploring close to its existing operations with a view to extend mining beyond 10 years. ''With an absolute worst-case scenario of the nickel price immediately collapsing to $US7 per pound by June 2007 and then staying at that level for 10 years, Sally Malay is worth $US1.53 per share,'' Eagle Research analyst Keith Goode said. Consolidated Minerals moved into nickel production last year, but the benefits have been largely overshadowed by the collapse of its main manganese market. Analysts are starting to factor in higher earnings from the 8000 tonne-a-year East Alpha nickel expansion and the company's share price has rallied 29 per cent in the past week to $2.18. BRICs good place to start -- not stop AT A PEAK Emerging markets earnings relative to world earnings Index 80 Source: Lehman Brothers, Factset, IBES, Datastream, FTSE 2006 2004 2002 2000 From page 19 Russia has benefited from the oil and gas upswing. Indonesia is a net exporter of energy and Argentina and Brazil have, this year, become small net exporters of oil. Some countries have become less dependent on US trade. Many countries have low interest rates. Globalisation is a primary force behind economic activity. HSBC's head of global emerging markets research, Philip Poole, reckons that investors have been so captivated by BRICs markets that they've sometimes missed attractive opportunities elsewhere. ''For cross-over investors, BRICs is a good place to start investing in emerging markets, not the place to stop,'' he says. Here's the fundamental stuff. Argentina, Chile, Vietnam, Indonesia and South Africa are all net exporters of commodities, like Russia. Russia, however, is a standout oil-and-gas play. Chile relies heavily on copper exports but is also a net exporter of soft commodities, as are Argentina, Mexico, Turkey, Vietnam and the Philippines. The Philippines, Argentina and Indonesia have much in common with India and Brazil in terms of high growth and working age populations ± future pools of low- cost labour. Vietnam is challenging China's position as a production offshoring base in Asia. Turkey should benefit from production offshoring from Europe. ''Several countries should benefit from [credit] ratings upgrades,'' Poole says. ''In addition to Brazil and Russia, we highlight the relatively high probability of an upgrade for Philippines, which is also arguably trading cheap to its rating. ''Among the non-BRICs markets, we advocate overweight equity positions in Mexico and Korea . . . and Egypt and Malaysia.'' Poole does acknowledge that the investment climate for emerging markets has deteriorated. Still, he expects emerging markets equities to deliver positive returns over the next 12 months. ''In Korea, domestic liquidity remains strong with continued heavy inflows into equity-related investment trusts. For Mexico, the positive picture is complemented by an improved political climate. ''Analyst earnings revisions, which historically correlate well with market performance, are now stronger in Mexico than any other emerging market. Egypt is likely to be a continuing beneficiary of the huge flow of oil-related liquidity which is being spun off by the Gulf countries.'' Poole's view isn't shared by Lehman Brothers' global equities strategist, Ian Scott. Scott notes that earnings growth in the emerging world has lagged that of global earnings this year. Moreover, he doesn't think the excessive fund flows into emerging markets over the past year or so have moderated sufficiently to make emerging assets more attractive. Emerging markets have suffered an outflow of $US2.5 billion ($3.3 billion) over January to July this year. Scott isn't impressed, either, by the 39 basis points of risk premium embedded in emerging markets. While that's an improvement from 1998 to 1999, it isn'tas attractive as has been the case since 1991, he believes. ''With earnings growth slightly shy of the developed markets, valuations that contain little additional risk premium compared with developed markets and a potential hangover from the excessive fund flows earlier in the year, we do not feel inclined to alter our recommended underweight position,'' Scott says. Scope for $A to rise Money Corinne Lim '' Opportunities to pick up $A may arise.'' SMALL CHANGE Performance of the $A against major currencies this month % change +2.38 +2.35 +1.87 +1.74 +1.49 +1.47 +0.91 +0.55 +0.34 +0.06 Source: Bloomberg Canadian dollar Swiss franc Euro Japanese yen Sth Korean won British pound Taiwan dollar US dollar Singapore dollar New Zealand dollar So many in forex have been frustrated by the swings in monetary policy expectations lately. Yesterday, the Australian dollar hovered at US75¢, well up from the US74¢ levels a couple of weeks ago, supported by its long- standing allies: expectations of an interest rate rise, and stronger commodities and base metal prices. Yet, it could arguably have been more robust given the rate-rise camp had been encouraged anew last week by hawkish remarks from the Reserve Bank. The restraining factor? A US dollar on the rise, as traders backpedalled from too- pessimistic views of the US economy and attendant expectations of early rate cuts. Speculators and fund managers aren't overloaded with $A ± they're holding modest long positions and are content for now. A long position is essentially a bet that the currency will appreciate. The latest figures from the Commodity Futures Trading Commission show speculators lifted a net long $A position to 35,250 contracts in the week to October 10, from 21,581 contracts the previous week. There's scope for more $A in portfolios if you're in the camp that doesn't believe a 25-basis-point rate rise next month has been fully baked into the currency's value. Futures traders betting on the level of the official cash rate have priced in a 60 per cent chance the rate will be 6.25 per cent by November and a 100 per cent chance it will be there by December. The rate is now 6 per cent. Next week's September quarter inflation data is a likely catalyst for an intensification of rate-rise expectations. Between now and then, opportunities to pick up $A may arise. ''If another rate rise was completely priced in, the $A would be closer to US76¢,'' Westpac's chief currency strategist Robert Rennie points out. ''The CPI will do it. The $A, in the near-term, is a buy- on-dips around US74.80¢ to US74.90¢ given the risks associated with an RBA rate rise.'' Friday's $1.2 billion issue of uridashi by Toyota ± $A-denominated bonds targeted at Japanese retail investors ± was chunkier than expected. Still, $A demand from that market may be muted by the $A's strength against the yen. At ¥89.75 yesterday, the currency was nearing the key ¥90 mark. Barring a few weeks last December, the $A hasn't gained a foothold above ¥90 since 1997.