Mining for profits Down Under
Australia is a developed economy with the vigour of an emerging market, says this U.S. advisory, which picks three mining stocks.
The temperature will reach 28° Celsius today in Melbourne. It will be sunny all day.
But as Australia heads into summer, the real news is that its economy is sailing along under sunny skies.
Unlike most of the developed nations in the Northern Hemisphere, Australia did not sink into recession. Growth slowed, but the economy did not go under.
And it is recovering faster than most of its northern counterparts.
In fact, it is acting like an emerging market — which stands to reason, since it is feeds off the emerging markets of Asia.
And North American investors can feed off Australia’s relative prosperity, says one U.S. advisory.
Our guide to the island continent is a publication that takes a wide view of the world and its investments. Personal Finance is convinced that smart American investors will take the same wide view of the world — it frequently recommends Canadian stocks and income trusts, for instance.
Indeed, one of the three mining stocks it recommends for Australia has a Canadian connection that goes through Montreal.
But let’s begin by going back to where there’s a warm sun shining.
A big edge
Mr. Yiannis G. Mostrous is a leading expert on Asian markets. He joins Mr. Elliott H. Gue, editor of the advisory, in an analysis of the advantages that have pushed Australia to the upside.
Australia has a big edge on the U.S. in three ways, say these authors. First, it isn’t plagued with high unemployment. Job vacancies are dropping and hours worked are on the rise.
Second, it isn’t stuck with a bunch of unsold houses. In fact, the population is growing (unusual in itself in the developed world) and housing demand is on the rise.
Third, while the government primed the economy with stimulus spending, it could well afford to pay for it. And Australia’s financial system is on much firmer ground than America’s. The banks don’t depend on trading revenues, the authors point out. So instead of licking self-imposed credit wounds, they are investing in the country’s growth.
But there’s another advantage that’s bigger still — trade with Asia.
Fistfuls of money
“The Australian economy offers emerging market returns in a developed-economy setting,” say the authors. Australia ships natural resources to Asian destinations, most notably China.
In fact, China stocked up on those resources when commodity prices were lower, and is liable to scale back now that commodity prices are higher. But China will keep coming back for more as its economy grows, these authors reassure us.
China is also coming in with fistfuls of money to scoop up Australian companies. Less than two months ago, the Yanzhou Coal Mining Company acquired Felix Resources. More of the same should be on the way. The Chinese are anxious to tap into both Australia’s resources and its expertise in exploiting those resources.
In the wake of all this activity, the Australian dollar has been one of the world’s strongest currencies this year. At the same time, Aussie resource firms have worked diligently to reduce debt.
Looking at this encouraging picture, the advisory picks three stocks with a very big stake in Australia’s resources. The first made a notable acquisition in Canada two years ago, and may be a takeover target itself.
World’s biggest
Rio Tinto (NYSE-RTP) is the world’s biggest mining company. In 2007, its assets got considerably larger when it came to Canada and acquired Alcan, then the world’s third largest producer of aluminum and now the largest. Rio is big in just about every major mineral — iron ore, copper, coal, diamonds and gold.
Even though it is cautious about the immediate future, Rio Tinto is stepping up expenditures, with as much as US$6 billion earmarked for next year. It is also chipping away at a big load of debt.
And another “world’s biggest” is in the picture. Fellow Australian BHP Billiton (NYSE-BHP), the world’s largest diversified resource firm, may renew its efforts to take over Rio Tinto. Buy Rio up to US$215, say the authors. It’s trading at $206.93. The company has suspended its dividend for this fiscal year, but expects to pay a final dividend at year-end.
There’s some big gold to invest in, too, says this advisory. Lihir Gold (NASDQ-LIHR) owns one of the largest gold mines in the world. It’s a good way to ride the price of gold, the authors tell us, and they recommend buying the stock up to US$35. It trades at $26.90 and yields 0.5 per cent on a dividend of $0.15.
Supplying the giants
Now we go to Missouri. Yes, that makes sense. Peabody Energy (NYSE-BTU) of St. Louis is yet another “world’s biggest” — the world’s biggest private sector coal company.
But it’s getting much of its growth from Australia, which is (here we go again) the world’s leading exporter of metallurgical coal for steel making and thermal coal for power plants. While China can supply most of its own thermal coal needs, it is short of metallurgical coal. That’s one of the reasons Yanzhou bought Felix Resources.
And India is building up its coal-fired power generation at a rapid rate. It will be importing a lot of coal in the years to come. Peabody jumped into the Australian market early on, so it will be front and centre when it comes to supplying these two emerging giants.
Buy the stock under US$49, says the advisory. It’s at $44 and yields 0.6 per cent on a $0.28 dividend.
Not many of us will be taking the long journey to Australia to get some sun this winter. But investors may find that profits from the Land of Oz are not really that far away at all.
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