Disclaimer: All information on this section is of a general nature.
Before making any investment decision, you should consult your adviser.
Market Watch_State One Stockbroking_December 2017
Editor’s Note
On 6 November 2017, the benchmark ASX 200 Index hit 6,000 for the first time since January
2008, as investors piled into energy and mining stocks. Resource sector stocks found favour
on the back of big upward moves in the underlying commodity prices. While gains in
individual commodity price are being driven by specific factors i.e., Lithium and Cobalt ->
electric vehicle (EV) growth, Zinc -> supply constraints, Oil -> OPEC production cuts,
commodity prices as a whole are also moving higher against a broad backdrop of an
improving global economic outlook. Infrastructure continues to be an important driver of
commodity demand in China, while the rest of the developed world (US, Europe) is enjoying
a rare moment of synchronized economic growth. In addition, sector heavyweights like Rio
Tinto and BHP being rewarded for cutting costs and returning cash to shareholders. Perhaps
the fears of “waves of supply” a few years ago – particularly relating to iron ore – have forced
companies to rethink the strategy of building up new capacity every time prices rise. So far in
this upward leg of the commodity price cycle, the supply response has been muted.
However, after running strongly, it looks like the larger mining stocks (excluding gold) are
fully valued. We calculate that the 14 largest non-gold mining stocks offer an average total
return of only 2% (2.6% dividend yield, -0.6% capital return). At this juncture, iron ore play
Fortescue Metals (FMG) offers the highest total return (c27%) as calculated from its
IRESS consensus target price and FY18E dividend yield. Nickel play Western Areas (WSA)
and lithium play Orocobre (ORE) appear full valued, offering negative total returns of
~16%. See table below.