Resource bull market to continue

23-Nov-2016

By Sarah Kendell

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Blue-chip Australian mining stocks were looking much stronger following balance sheet clean-ups over the course of 2016 and stood to benefit considerably from continuing Chinese steel demand in 2017, according to Alphinity Investment Management.

Speaking at a media briefing in Sydney yesterday, Alphinity portfolio manager Stephan Andre said the market was significantly underestimating the earnings potential of major miners after being burned by overly optimistic expectations ahead of the commodity price collapse at the end of 2015.

“If you take high coking coal, for instance, the price is now $300, but the market expectation is for it to go back down to $130, so there is the potential for a massive earnings surprise if the price stays where it is,” Andre said.

“Even if it goes further down, you would really have to have a collapse in prices in order to meet the expectations of the market, which have become too bearish.

“It’s typical human nature – when things get bad you tend to remain too optimistic and you then get a surprise on the downside, and when prices get up too much people think it’s not sustainable so it surprises on the upside.”

While the fund manager believed commodity prices would retreat somewhat from their current highs, he said mining stocks were unlikely to suffer as badly as they had during previous price declines as the fundamentals of their business looked significantly better.

“If you take Fortescue, if commodity prices go to the level we are predicting, there would still be a 50 per cent upside in earnings, and if they stay at the current level, there would be a 150 per cent upside,” he said.

“It’s an earnings improvement but it’s also to do with the balance sheet side – a few years ago people were concerned the company would go broke if the iron ore price fell, but now they have gearing at 40 per cent and by FY19 they could be completely debt free.”

He added the “twin engines” driving renewed Chinese commodity demand – the infrastructure and property industries – were likely to continue their current pace as the government was determined to maintain economic stimulus until the October 2017 Party Congress, when the Communist Party would change its leadership.

“These two engines are quite positive for Australia because infrastructure and property accounts for around 60 per cent of steel consumption in China,” he said.

“As a result, we are seeing almost 100 per cent price increases in some cases of commodities like iron ore, thermal coal, metallurgical coal, manganese – anything linked to the production of steel.”

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