Outlook Still Improving – Resources Stocks Surging

 

Key Points

Life has certainly returned to the badly beaten and left-for-dead body of ASX resources stocks over the past month and all is in line with the Dawes Points of Global Resources Boom unfolding.  Substantial gains are being made everywhere in resources as more appropriate values are reinstated as the doomsayers are proven wrong yet again. What did all these vociferous bears hope to gain?

It is pleasing to see the expansion of market breadth as surging gold stocks are joined by lithium hopefuls and many other small cap opportunities and even RIO, BHP and FMG look very constructive.  I noted on a recent (15 April) CNBC TV interview that RIO was in the best shape I had seen it in probably 20 years.  Big long life low cost Tier One operations in iron ore, copper and aluminium with a balance sheet that is almost back to a reasonable level.  The ill-timed Alcan acquisition seems to have been restructured so that the aluminium operations now provide low cost hydro power aluminium along with low cost bauxite and surety of supply alumina.  Iron ore doing around 270mtpa (net) with every US$10/t price bringing in US$2.7bn in revenue and it is going straight to the bottom line.  Copper operations are settling down with Mongolia, Indonesia and Chile improving.

BHP has been similar and what about the outstanding performance of FMG.  Costs down to around US$15/t.  Where are all the FMG doom and gloomers now?

RIO has brought its fob iron ore costs down to under US$15/t (let’s say sub US$20/t delivered to China) so at US$60/t that is 270m x US$40/t operating margin = $US10.8bn (almost A$14bn) operating surplus. FMG and BHP are matching these fob costs so FMG has 165mt x US$28/t = US$4.8bn (A$6.1bn) operating surplus while BHP is looking at 270mtpa for US$11.8bn.

Both BHP and RIO have indicated their own new supply is being restrained so the iron ore market can only get tighter.

The iron ore market is showing the typical signs of a market dominated by the continuous negative sentiment that ensures everyone in the supply demand chain has run down inventory.  Mine and shipping port stocks have been run down as have mill stocks and even the China port stocks compared to +1000mtpa of imports are relatively low.  As steel stockists pick up their inventories the steel mills follow and the demand for ore rises.  Let’s just see where we go but iron ore share prices seem to be suggesting that the iron ore rally does have a lot more to run in 2016.  I am guessing US$80/t but then I am a bull.  What are the US investment banks saying now (especially those who have never been to China!)? False rally and another downturn? One major US IB has FMG valued at A$2.40 at 3x FY17 EPS!

Some recent data from China suggests infrastructure spending is starting to rise again to add to housing construction stimulus and metals inventories are being rebuilt.  I saw a reference to China adding another 100-120mtpa steel capacity this year.  Old high cost and small units are likely to be significantly reduced as the new more efficient seaboard mills take over in a general reduction of excess capacity.  A reduction in capacity from 1150mtpa to match 800mtpa production should not affect steel production nor iron ore demand.

Try to get some idea of the market dynamics with this table.

The PERs are for Iron Ore alone.  RIO ~7x EPS and FMG ~2.5xEPS.  Everything else is free!

Do you have enough BHP, RIO and FMG?

BHP A$  2006 -2016   BHP US$  1996 -2016
RIO A$ 2006 -2016  US$ 1996 -2016
FMG A$ 2006  – 2016    US$   2008 -2016

Dawes Points said BUY on 7 March 2016.

A$ US$  (NY Close)
7 March 20 April % 4 March 20 April %
BHP 18.55 19.67 9.3 27.35 32.53 +18.9
RIO 46.47 49.29 10.0 31.95 35.42 +16.8
FMG 3.08 3.32 13.6 1.87 2.80 +49.7

Industrial Metals

As pointed out in Dawes Points over the past year or so the trend of LME inventories has been down and while we are seeing rises in copper in Shanghai the conclusion has still been demand has remained unspectacularly firm.   Aluminium stocks are down 32% on LME in the past year and in China inventories are down over 30% in the past six months.

We know zinc and tin have no inventory but it seems that all the LME metals are starting to looking firm again.

We know Shanghai has more copper inventory but when you use China’s 12mtpa, 800kt is just four weeks.  With the LME numbers, which include some Chinese numbers, it is less than a week.   Of course with China at 50%, the other 50% doesn’t matter, does it.  Yeah, right.

Nickel is bottoming and reversing.

Nickel is fascinating to watch.  Nickel pig iron made from laterites in Indonesia and the Philippines has provided the stainless steel market with contained nickel units (one unit = 1% = 10kgs per tonne) at a discount and iron units for free. The rapidly growing 200 series of nickel alloys prefer nickel pig iron.  Why bother with expensive and expensively refined pure nickel metal?

All this may now be changing and should lead to a recovery in nickel prices.  Reduced nickel pig iron supplies and already reduced stainless steel inventories have kept the market weak. However, restocking seems to be underway and just might bring about a sharp rally in nickel price.  The share market seems to think so.  Look at all this:

LME Nickel

WSA  Western Areas

POS Poseidon

Guess what I have been doing here.

The leading second liners in the Resources Sector include IGO, OZL, S32 and WSA.  I have been buying these last two along with the big three RIO, BHP and FMG.

Gold Sector

The Gold Sector in Australia is clearly leading the world in the current reflation.  I have been saying this for some time and I am sticking to it.  Our gold industry is globally important.

ASX Gold Index chart     Heading for 6000 in 2016 from current 3685

WA produces around 70% of Australia’s gold output of around 280t with the Yilgarn around Kalgoorlie providing about half of WA’s 180tpa.  From this it is clear that Kalgoorlie missed much of the 2003-2010 Gold Boom but is now making its mark.

I hope you are now fully aware of the importance of the Zuleika Shear Gold Camp.  The Gold Camp concept is unfamiliar to the Australian gold industry nowadays.  I understand it as multi company operations along a structure of numerous mines.

This hasn’t really happened in Australia since the 19th Century when we had Bendigo, Ballarat, Charters Towers and maybe Hill End.   Most major WA mines have been single mines with single companies so the Zukeika Shear is of MAJOR significance.

Zuleika Shear at Kundana fits this Gold Camp concept well.  Northern Star has the East Kundana JV (Hornet, Raleigh, Rubicon and Pegasus) and its wholly owned Millenium while Evolution has Frogs Legs, White Foil and the Phoenix acquisition.  Torian (TNR.ASX) has many of the bits in between.

Note the difference between the narrow high grade K2 Shear deposits associated with black shales (including Pegasus-1.2moz @ 11g/t, Rubicon, Hornet, Frogs Legs -1.3mt @ 6g/t, Millenium etc) and those in dissipated lower grade deposits in more porous rocks closer to the Kunanalling Shear, being Castle Hill and White Foil.

Long Section of Kundana portion of Zuleika Shear

(This is from NST’s outstanding good website – see Our Assets/Kundana and entry to this brilliant interactive 3D model at the bottom of the page)

You should also be aware of Northern Star’s latest comment on EKJV – Rubicon- Hornet-Pegasus join at depth with over 2km in strike.  3moz endowment to 600m (1.5moz mined) and extension probably to 1800m with another2-3moz at ~10g/t.   200kozpa probably going to 300mozpa. (No wonder 37.5% JV partner TBR jumped 40% to A$5.60.  How about TBR’s 140koz in the vault (@A$1600/oz =A$225m = A$4.50/share) and growing 100ozpa at A$600/oz AISC managed by NST so A$100mpa pretax (~A$2/share = A$1.40 A/tax EPS PER <3x)) with mine life of at least ten years– is anything cheaper under the sun?).  Forget the idiosyncratic management issues, just enjoy the ride.  We have!

Is there a better gold mine region in the world today?   >3moz @ ~10g/t!

Northern Star is the pick of them all but the market hasn’t fully grasped this yet.  NST told me It seems many major IB analysts have made recommendations with even contacting the company let alone having visited the mines.

Evolution has also hit the jackpot with the acquisition of La Mancha and Phoenix.  And most think Lake Cowal is the most important because of its low grade open cut long life.

Have a look at these:–

Historic Gold Production

Growth in Contained Gold in Resources

Two magnificent companies in NST and EVN with TBR and RND as carried partners and one tiddler along for the ride- TNR.ASX.  Can it get any better?

While clients have done well in NST, EVN and TBR (and of course BLK, DRM, GOR, OGC, MML, SBM and RSG – we also flagged DCN a year ago and watched it do spectacular things) Paradigm has also done capital raisings in four small golds:-

AUC Ausgold – Doing a Gold Road on the Katanning Trend east of Perth and near Boddington

SWJ Stonewall Mining– An outstanding small cap in Sth African goldfields off the Witswatersrand

CYL Catalyst Metals –  finding another Bendigo – 32moz potential – impressive shallow high grades

AHK Ark Mines – Feeding 30koz deposits into tolling mills to give

All are extremely cheap.  Lots more coming.

The Australian domiciled companies with operations in Australia have consolidated recent strong gains whilst the Australian domiciled companies with offshore production have played catch up with recent good performances by RSG, TRY and PRU.

And gold itself is looking exciting too. Doesn’t this look good!

And the Wave 3 in the Philadelphia Gold Index is truly underway now to new highs in a 15 year + bull market.  This is truly spectacular. Time frame is 1984-2016 here.

And the short term as shown by the GDX ETF shows the downward sloping wedge and the upturn on massive volume

Please note the time frame from the 2008 highs, the GFC lows, the 2011 irregular rally to new highs and the nearly five years of tortured decline.  Almost eight years of bear market (2008-2016) following eleven years (2000-2011) of rising US$ gold prices so expect +15 years of bull market to come yet!

Getting a bit pedantic here but resources/commodities really peaked in 2007/08 and only gold, copper, tin and iron ore amongst the major commodities and gold stocks made new highs in 2011.  For most things resources, 2011 was a not a happy time and was just a relief rally in the decline from 2007/08.

Keep in mind that the US$ gold price peaked on 21 Jan 1980 and the ASX Gold Index peaked over seven years later in mid-1987 so don’t get caught up mixing gold price and gold stocks.

Trying to put it all into perspective

Very long term DOW-Jones.  Does this look like Crash Scenario?  Maybe just hold on to your hats because we may have lift off very soon!

China  Is looking good  The Hysteria was just hysteria

China risk is declining rapidly as the country moves away from SOEs and a more entrepreneurial China takes over.

That 8-10% pa growth in personal disposable income coupled with the highly fragmented nature of most of its industries means that rationalisation, aggregation and consolidation will continue to add to economic growth for decades.

Here in Australia the Dongfang Modern IPO has been spectacular!  What can you say?  A$90m earnings was 20% above Prospectus forecasts, paid a higher A$0.05 dividend and is up 148% on the A$1.00 IPO issue price. Will it rise another 4% this month to hit A$1,000m market cap on 11x EPS?

We still hold almost all our stock here at Paradigm.

We also supported Patersons’ JC international China IPO. Up 30% on the issue price and on 5x EPS.

I have another with Living Cities property development in the western city region of Chengdu.   Join in for the ride.  About 1.5x pessimistic case EPS FY17.

All these show opportunities of growing in an inconceivably large economy that is continuing to boom.  Even the bearish IMF has recently upgraded its outlook for China from 6.3 to 6.5% for 2016.  Does anyone really listen to these Euro-bureaucrat turkeys?

India   Ready to move up again after 12 month correction

FTSE UK coming up to something special

 

 DAX   Germany looking good.

No Crashes here!!

Just the major ongoing BULL Market as 3500 million people in Asia want improve their lives.

OIL SECTOR   Strong bounce suggesting much more

Big Oil in the US suggests the worst is over as well.

So things in Resourcesland are looking well, BRILLIANT, and so you expect further Equities Explosions as the Gold rally encourages short covering in so many areas and will lead into our Global Boom.

THE A$  – SO MUCH MORE UPSIDE TO COME

– THE POLITICAL PRESSURE DEVELOPING WILL BE EXTRAORDINARY

Barry Dawes
BSc F AusIMM MSAA

Edition #47

I own BHP RIO FMG NST EVN RSG GOR DRM TBR BLK DFM CGN TYX PNR MLX WSA POS S32

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