Why are mining stocks suddenly feeling the love?
Resource stocks: they’re the scourge of the market, then they’re the darlings.
The strong rally of the last week and a half has seen mining stocks such as the BHP Billiton spinoff South32 surge 30 per cent. Does it mean the worst is over?
In the last seven trading days the local sharemarket has bounced 6.7 per cent. Energy and material stocks have lead the way, rising 9.2 and 7.6 per cent, respectively. They eased somewhat today, with the market taking a break from its rally of the past days.
But resource shares have come back into vogue, helped by a weaker US dollar giving them a bit of breathing room.
“The US dollar has finally cracked as people price in [lower] interest rates,” says James Gerrish, senior investment advisor at Shaw & Partners. “And so those riskier commodity sectors are starting to perform better now. I do think resource stocks have bottomed out.”
South32, which produces resources including aluminium, manganese, silver, zinc, lead, nickel, coking coal and thermal coal, had a fiery trading day on Thursday, leaping nearly 6 per cent. Whitehaven Coal also experienced a rush, the stock rising nearly 14 per cent.
“There was definitely money moving in coal stocks,” said Mr Gerrish. “All those beaten-down plays that are cheap and have been priced into oblivion in the commodities, they produce. They’re rallying really hard.
“South32 and Whitehaven don’t have a lot of debt either, which has definitely helped.”
Investors also seemed to like reports that South32 is in talks with South Africa’s Anglo American to buy its manganese unit. The two companies share a manganese mining and smelting business based in Australia and South Africa. Anglo American owns 40 per cent of the enterprise.
But mining stocks more broadly are rallying, too, after a successful refinancing by Ivan Glasenberg’s Glencore on Wednesday. The Anglo-Swiss mining company’s shares rose 17 per cent on the news, pulling fellow heavyweights Rio Tinto and BHP higher. Copper miner Oz Minerals also enjoyed a strong week, hitting three-year highs.
The Bloomberg World Mining Index rose to post its first five-day increase since October, gaining more than 9 per cent over the period and reversing losses this year.
“There has been a broad sweep change that comes when markets begin to bottom out,” said David Lennox, a market analyst at Fat Prophets.
“Risk-on is on, and of course the dollar going down also helps. But a lot of the factors that have impacted commodities generally are still in place. There are still supply surpluses across a number of commodities.”
Iron ore hasn’t received nearly as much attention as the recent oil rally, but Australia’s largest export commodity has also rebounded above $US47 a tonne, giving producers a bit of breathing room. Fortescue Metals’ share price was swept up in the market rally of the last week and a half, though analysts warn the ASX isn’t out of the woods yet.
“I think this is a relief rally,” said Mr Gerrish. “Then we’ll get a bit more cautious. The market has overextended the downside and then it’s snapped back a little bit too hard.”
The Sidney Morning Herald