Short term selloff creating value

Key Points

The past few weeks has provided a salutary lesson in the volatility in the market place and early calls for the market upturn in all things resources.  The fundamentals of economic growth still look very good and recent market gains for many small cap resources appeared quite constructive.  Stock markets around the world are still signalling much better days ahead.

But pessimism is again strong globally and the short term trading trends continue to spook these thin markets where traditional investors are still holding onto defensive positions and lots of cash.

A surging US$ has recorded a 7% rise in the USDX since mid July and sent the world looking for deflation/catastrophe havens again due to ISIS and also the tensions in the Ukraine. And whatever else.

Most commodities came off more than the rise in the US$ and the continuing chants of Down with China and China Down reached another crescendo despite the Shanghai stock market surging 17% since July and the PMI remaining a good 51.1!

The iron ore price and the A$ sank together.

So is it all over now for resources?

Let’s just review the evidence and consider with the graphics from the last Dawes Points.

First

My travels in the past few months have taken me to site visits in some exotic locations but also Singapore and just now Melbourne for IMARC.

I delivered a paper at IMARC on an outlook for the A$ with key conclusions being

IMARC also brought out the extraordinary productivity gains in mining technologies such as Orica’s amazing new blasting techniques that can separate overburden from ore and also cleverly use chemical energy to fracture rock to smaller pieces rather than using slower and more expensive mechanical energy.

RIO, too,  is well on the way to higher productivity in iron ore mining with driverless blast drilling, driverless excavators, driverless truck and of course driverless trains.

The productivity benefits are only now being felt but you can be assured that the blow out in costs is being rapidly wound back and that Australian mining companies will again be very competitive.

All these market actions seem to me to be suggesting a short term panic that has just about run its course and is leaving outstanding value on the table.


Barry Dawes

Head of Resources

BSc F AusIMM(CP) MSAA MSEG

Follow me on Twitter @DawesPointsBarry Dawes’ expertise in the Australian resources sector is based on his knowledge as a geologist combined with over 30 years’ experience in the resources investment sector. Prior to founding Boutique Investment Firm “Martin Place Securities” in 2000, Barry had worked in senior executive roles of investment management with BT Australia, equities research for Bain Deutsche Bank and equities research and corporate finance for Macquarie Bank. He is currently a Director of a number of unlisted public operating companies. Barry has a substantial depth of knowledge and experience in the international resources industry and is well known for his views on the sector. 

 

 

 

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