Analysts Take Wry View Of Hard Line
Sydney Morning Herald
Saturday January 31, 2004
It promises to be an interesting year for the back-in-favour resources sector, with most pundits tipping further commodity price rises thanks to China's seemingly insatiable appetite for raw materials.
In the meantime, however, analysts are busy sifting through a mountain of December quarterly production reports.
Although it's still early days, the reporting season has already proved difficult for some mining stocks whose prices reflect future, rather than past, earnings.
As Fat Prophets Mining puts it: ``The upcoming financial reporting season will provide some disappointing results as average prices during 2003 didn't reflect the improving conditions that had emerged by the end of the year (with some exceptions, notably nickel).
``This is particularly true in terms of Australian currency translations, where prices actually declined for some commodities in $A terms."
The market's savage reaction to Alumina's solid operational result on Wednesday is a good example of the high standards some investors have.
CSFB said of the result: ``Alcoa would no doubt be pleased with the operational performance. But herein lies the conundrum the chasm of difference that lies between a corporate view versus [that of] the equity market.
``So whilst the result was operationally OK, it fell short of equity market expectation. We expected that the AWAC result would set the tone for the metals and mining sector. And [the] reaction is certainly suggesting that this will be the case."
The accompanying table puts things in perspective and suggests 2004 is shaping up as a good year, especially once the current batch of reports washes through.
Exco draws interest
Given the commodity prices outlook, it is becoming increasingly difficult to unearth companies at the smaller end of the sector which don't already have premium built into the share price.
At first glance, Alasdair Cooke's Exco Resources looks as if it's done its dash with the shares rising from 5c in September to 25c.
But Fat Prophets Mining notes that the company is quickly increasing copper resources in the Cloncurry area in Queensland and will shortly outline its Mount Margaret reserves estimate. ``More importantly, it will also outline how it intends to bring these reserves into production," the broker notes.
Much of the Perth-based explorer's recent share price appreciation relates to last year's promising test results at Mount Margaret, which is 8km east of Xstrata's Ernest Henry mine.
Fat Prophets believes a deal with Xstrata would help speed up Exco's potential transformation from explorer to producer.
This could involve Xstrata helping to bankroll a high-grade plant at the Ernest Henry mine to process Exco's high-grade reserves. In return, Xstrata would process the lower-grade Mt Margaret ore at a later stage in the Ernest Henry mine life.
Fat Prophets compares Exco with the newly listed and higher profile Tritton Resources, which is developing the underground Tritton deposit in central NSW.
While Tritton has a larger resource/reserve base and higher forecast copper production rates and Exco is still estimating a reserve base at its various deposits, the resource/reserve conversion ratio is likely to be high due to most resources potentially being mined through open pits.
The broker says Tritton's adjusted enterprise value of more than $105 million gives it confidence there is further upside in Exco's $20 million enterprise value.
Cloud with a nickel lining
While the nickel sector has enjoyed a wonderful 2003, there are some bulls who are predicting more of the same this year with supply expected to remain tight.
According to UBS, ``major producers have indicated that deficits of up to 50,000 tonnes are likely over at least the next two years" due to a combination of strong demand and low inventories.
Adding to the anticipation is the potential for strike action at Falconbridge's Sudbury operations, which accounts for 4 per cent of world supply. UBS points out how ``sweet life is for some junior nickel stocks".
A good example is Tectonic Resources, which released a solid quarterly result earlier this week.
The Perth-based group produced a record $7.15 million in earnings for the quarter, double the full year 2002-03 earnings of $2.3 million.
On the production side, Tectonic's RAV 8 nickel mine had its second successive quarter of record production, with nickel transported to WMC's Kambalda concentrator up 19 per cent on the previous quarter.
Then there's the group's Phillips River gold project, which is expected to begin first production before the end of the year.
An expansion of the resource base at the Kundip operations to 205,000 ounces
of gold was achieved during the quarter, largely as a result of upgrading the
Harbour View and Harbour View North structures.
LOOKING LIVELY
Commodity 2002 average 2003 average
Current spot price
Aluminium USc/lb 61.20 64.90
73.20
Copper USc/lb 70.60 80.70
111.50
Lead USc/lb 20.50 23.40
34.30
Nickel USc/lb 307.20 437.30
663.40
Zinc USc/lb 35.30 37.60
45.50
Gold $US/oz 309.84 364.11
406.00
Silver $US/oz 4.60 4.88
6.25
Oil WTI $US/barrel 26.08 31.07
34.10
$A/US exchange rate 0.544 0.653
0.778
© 2004 Sydney Morning Herald