26/08/2010 - 00:00

Investors scramble for value as mining tax, ongoing GFC fallout sour market

26/08/2010 - 00:00


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The past year has been one of extreme highs and gut-wrenching lows for investors, as the global economy struggles to shake off the lingering impacts of the global downturn.

Investors scramble for value as mining tax, ongoing GFC fallout sour market

AS Australia struggled out from the shadow of the global financial crisis in 2009, investors were desperately hoping to do more than just recover their losses.

Certainly the signs were promising in the first half of the financial year as the Australian share market bounced back strongly on the back of Chinese-led demand for Australian commodities, and signs of life in the moribund US economy.

But much of that early optimism faded in the first few months of 2010 as fears of sovereign debt defaults in Europe sparked a renewed phase of volatility on global equity markets.

In Australia, the impact of skittish foreign markets was compounded by the Rudd Labor government’s shock plans, announced in May, to slap a super profits tax on the entire resources industry.

For all that, however, WA Business News’ annual review of total shareholder returns shows that, overall, investors were still far better off in 2009-10 than the preceding year.

The TSR survey has been held every year since 2001, catching the tail end of the dot.com boom and subsequent bust, tracking the ensuing years of resources-led growth and charting the dramatic impact of the global financial crisis.

Collated by data provider Morningstar, the TSR survey factors in share price changes, dividends, capital returns, share splits and any other corporate events to calculate the total return that shareholders have achieved during the past five years.

The 2007 financial year was the pinnacle for investors in local stocks, with 75 per cent of all listed WA companies delivering a positive return to their shareholders.

It then sunk to record low of just 16.4 per cent in financial year 2009 as the global downturn reached its nadir, before bouncing back to a much more positive 53 per cent in the latest survey period.

That level of recovery is supported by the performance of superannuation funds for the year, which also showed a strong rebound in 2009-10.

According to specialist superannuation research group Chant West, super funds across the board returned to growth last financial year after two years of negative returns.

Chant West’s figures indicate the median growth fund averaged a 10.4 per cent return last year, compared to 11.1 per cent for ‘high-growth’ funds, 9.9 per cent for balanced funds and 8.7 per cent for conservative funds.

However, growth funds would still need to return a further 15 per cent to get back to their levels in October 2007, before the global financial crisis began to take effect.

Despite the uncertainty surrounding the resources sector over the past few months, miners and explorers again dominated the list of the state’s top performers, both at the big end of town and at the small cap end of the market.

In fact, the top 10 performers of the 730 or so listed companies based in Perth all came from the resources sector. The performance cements the sector’s reputation as both a bellwether for the broader economy, and the best means of exposure to the Chinese economy.

Juniors top the charts

Unlike last year’s survey, which included at least one billion-dollar company (Extract Resources) in the best performers, all top 10 performers this year are small caps.

As always, their performance reflected changing trends in which commodities most appealed to local investors, as international and local market conditions fluctuated.

In particular, the Rudd government’s plan to tax Australian miners propelled interest in stocks with overseas assets, while iron ore lost its appeal to other commodities linked to steel making, such as manganese.

The year’s top performer was aspiring manganese explorer Groote Resources, which turned in a spectacular 1,005 per cent return for the year after switching its focus from uranium to manganese, a key steelmaking ingredient.

Previously known as Western Uranium, the company acquired an unlisted manganese explorer in February and now holds extensive seabed exploration licences near BHP Billiton’s vast Groote Eylandt manganese operations in the Northern Territory. It also raised its profile by recruiting former Fortescue Metals finance chief Chris Catlow as chairman in March.

As a result, Groote shares surged 10-fold from just 7.4 cents to 85 cents in the 12 months to June 30. Nonetheless, its market capitalisation remained only $36.7 million. Its share price has since retreated slightly to levels about 75 cents.

Changes in focus were also crucial to the results for the second and third ranked performers, RTL Corporation, and Nucoal Resources.

RTL Corp delivered a massive 948 per cent return, its shares rising from 1.6 cents to 3.2 cents, though its market value remained only $20 million cents, after ditching manufacturing for coal exploration,

Previously a builder of specialist underground mining trucks, RTL in March secured an option over coal leases in Mozambique, next to those of successful Perth-based coal miner Riversdale Mining. RTL’s African focus was another reason investors rushed the stock after May, when Kevin Rudd announced his plans for a super profits tax on Australian miners.

A switch to coal was also the reason for an 844 per cent return for Nucoal Resources. Formerly known as Supersorb, the failed WA producer of kitty litter, Nucoal shares soared eightfold to 20.5 cents over the year on the back of its purchase of the Doyles Creek coal project in NSW’s Hunter Valley. Now led by former Newcrest Mining chief Gordon Galt, the company has since relocated to Newcastle and will no longer feature in the TSR survey.

Meanwhile, South Boulder Mines turned in a 647 per cent return on the back of securing potentially rich potash leases in Eritrea last year. The rise to 68 cents reflected investors’ enthusiasm for fertiliser feedstocks, and their desire for offshore exposure in the wake of federal Labor’s disastrous mining taxation plans.

Low-profile WA explorer Great Western Exploration climbed the charts, recording a 619 per cent return (to 12 cents) after it secured a big strategic landholding near Sandfire Resources’s Doolgunna copper strike near Peak Hill.

An overseas focus was crucial to both sixth-ranked Carbine Resources (580 per cent) and eighth ranked Prosperity Resources (547 per cent), which are exploring in Burkina Faso and Indonesia respectively.

Notwithstanding its name, Zinc Co of Australia was the only iron ore explorer to make the top 10, generating a 530 per cent return for the year, while ninth ranked Korab Resources booked a 518 per cent return after diversifying into phosphate in Australia and unveiling plans to spin-off its European and Australian gold assets.

Rounding out the top 10 was the Miles Kennedy-led explorer Resource & Investment, which generated a 517 per cent return for the year after securing a parcel of tenements immediately next to Sandfire’s Doolgunna copper strike.

Miners rule big end

While the biggest returns were generated at the more speculative end of the junior exploration sector, the same forces could be seen at play at the big end of town.

Of WA’s 100 biggest listed companies, those in the resources sector tended to outperform their non-mining peers.

Newly renamed Canadian coal play Coalspur Mines, chaired by veteran mining dealmaker Ian Middlemas, was the standout with a 740 per cent return for the year, lifting its market cap to just over $303 million. Previously gold explorer Xenolith, the company holds advanced coal assets in Alberta province containing almost one billion tonnes of export quality thermal coal.

Its performance was so strong it also generated the third best return over three years (97 per cent) and sixth best return over five years (75 per cent).

US-focused oil explorer Aurora Oil & Gas ranked second with a 515 per cent return reflecting global investor appetite for companies with shale gas reserves in the US.

The only company not exclusively involved in the resources sector to make the top 10 was Perth engineering and construction contractor Forge Group, which capped a stellar year to come in at third with a 507 per cent return for the year.

Nonetheless, most of its gains were on the back of its success in winning resources-related contracts and its alliance with Clough to enable it to win bigger contracts, especially in the oil and gas sector.

West African gold developers Ampella Mining (410 per cent) and Perseus Mining (215 per cent) ranked fourth and fifth respectively.

Doolgunna discoverer Sandfire Resources ranked sixth best over one year, with a return of 208 per cent, but it was the best performer over three years with a return of 107 per cent, and second best over five years (97 per cent).

The best performer of WA’s largest companies in last year’s survey, African uranium developer Extract Resources, managed only a modest 0.64 per cent return over one year in the latest survey, but was the second best performer over three years (98 per cent) and the best performer over five years (110 per cent).

Though resources companies totally dominated returns by the state’s largest companies, there were still strong performances from businesses in other sectors.

IT services specialist ASG Group ranked 11th, with a one-year return of 147 per cent on the back of contract wins with government and private entities, including Western Power, the Department of Prime Minister and Cabinet, the federal Treasury and Vodafone Hutchison.

Engineering and construction group Decmil ranked 13th with a return of 122 per cent, though like Forge, most of its contracts were resources related, most notably at the $43 billion Gorgon LNG development on Barrow Island.

Local telco Amcom Communications was not far behind at 16th with a return of 107 per cent, while drilling contractor Ausdrill was 19th with a return of 95 per cent.

Perth-based global education pioneer Navitas was the next non-resources company at 25, with a return of 78 per cent, while giant-killing internet service provider iiNet was ranked 28 with a return of 75 per cent.

Dividends important

While straight share price performance was the main driver in shareholder returns for most WA stocks last year, the impact of dividends was also important.

According to the Morningstar data, about 73 WA stocks declared dividends during 2009-10, only a handful fewer than in the previous year.

And as in the previous year, the biggest yields tended to reflect weaker share price performance over the year.

Mobile accommodation builder Nomad, for example, delivered a trailing 12-month yield of 26.5 per cent, but posted negative returns of 76 per cent and 63 per cent over one year and three years respectively.

The company has had a horror time during the past two years, and this month booked a $61 million loss for the financial year as it was hurt by project delays and deferrals related to the global downturn.

Similarly, Morningstar estimates the yield for miner Straits Resources at just over 20.5 per cent, versus a negative one year TSR of 27 per cent and negative three year TSR of 30 per cent.

However, a number of companies managed to deliver both strong yields and positive shareholder returns.

Diversified autoparts and construction materials group Schaffer Corporation delivered a yield of 9 per cent as well as a 13.5 per cent TSR over one year, while listed investment manager Ozgrowth delivered a positive yield of 8.75 per cent as well as a one-year TSR of 8.7 per cent.

A number of blue-chip dividend payers also managed to combine capital growth with solid dividends, though in many cases it reflected their share price recovery from extreme lows the previous year.

Engineering group Monadelphous delivered a yield of 5.2 per cent, versus a one-year TSR of 13.2 per cent, Wesfarmers managed a yield of 3.5 per cent and a one-year TSR of 31.8 per cent, while WA Newspapers managed a yield of 6.9 per cent and one year TSR of 56 per cent.


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