Here’s a piece of advice your stockbroker has probably not passed on. Close to half of Australia’s mining stocks are now trading closer to their 12-month share price low points than they are to their 12-month highs. What does this mean? That the boom in mining shares is over, and we have entered the shake-out phase when takeovers become part of the game, and cash is definitely king.
The exception to this slide to more realistic prices is the energy sector where sky-high oil prices are bringing wide smiles to the faces of investors in oil and coal stocks, and will continue that way until either (a) oil prices fall because of rising production or (b) oil prices fall because the world has tumbled into recession.
Fingers crossed that it is (a) because (b) would cause considerable financial pain, apart from bringing an even more abrupt end to the mining boom which started little more than a year ago.
However, it is the fear of an oil-price-induced recession that is partly to blame for the decline of Alumina from a high of $6.80 in early January to a more recent price of around $5.11 – not far off the $4.86 of a year ago. In Alumina’s case, takeover chatter has been a factor in the rise and fall, but the downward trend in price is a worry.
It’s a similar story with a string of gold stocks that failed to fire. Croesus Mining at 49 cents is just above its low of 43 cents, and a mile from its 12-month high of 77 cents. Lihir Gold at $1.09 is closer to its low of 88 cents than its high of $1.83, and LionOre has come back with a thump from $8.91 last October to $5.65, a shade above its low of $5.40. Even Melbourne’s favourite miner, Oxiana, is down from $1.11 to 78 cents, awfully close to its low point of 68cents.
On the positive side of the equation, there are stocks that look healthier. WMC at $5.02 is closer to its high of $5.98 than its low of $3.61, though not by much (96 cents down from the high versus $1.41 up from the low) and there are a few hot stocks still attracting buying orders with Portman and Straits almost at their peaks of $2.07 and $1.40 respectively.
It is, however, the downside that fascinates because all speculative booms travel a similar trajectory. There is the soar-like-an-eagle phase, the oops-we’ve-gone-too-far phase and the long-slide-to-realism phase. It is Briefcase’s belief that we are sitting somewhere in the "oops" phase and about to enter the "long-slide".
There is no single cause of this change of direction. Sons of Gwalia, for example, is a case of a company shooting itself in the foot on the way from $3.99 to $1.41. A more common problem is found in metal prices, and the end to the China hype. Two graphs tell this story. The first shows a basket of base metals (copper, nickel, lead and zinc) that soared to a peak last February and has been flat, or trending down since then. The second is the gold price, which started the year with a bang but has also been trending down.
Delivering news of the silent share price retreat is not meant to dim enthusiasm for the resources sector. Rather, the aim is to introduce a note of realism and to remind investors that after all speculative booms come the tests of who’s actually got an asset (i.e.: gold/copper in the ground), who’s likely to mine (not many), who’s got cash left over from capital raisings (lots) and who’s likely to be predator or prey in the re-allocation of that cash.
LionOre is an example of a company with a pile of cash looking for a target. Mincor has the potential to act as consolidator of the untidy pack of small Kambalda nickel miners which would probably benefit from shared management and equipment. Jubilee needs to do something with its cash from the Cosmos nickel mine, Minara must become more than a one mine company and Consolidated Minerals should stop fiddling about with a grab-bag of ill-fitting investments and display a cohesive strategy.
Now comes the free advice (which is worth exactly what you pay for it). If you want to go on playing investment games at the small end of the mining sector as the takeover phase gets underway always back the prey, and never the predator. This is not meant to be an insult to any of the companies likely to lead the consolidation phase, it’s just a fact of life that very few takeovers actually deliver real value to the acquirer. The people who do best, in more than 80 per cent of takeovers, are shareholders in the target.
Speaking of changing phases in the stock market, there are interesting times ahead for everyone involved with that darling of the local market, Wesfarmers. Not only is it just 10 months from the handover of power from Michael Chaney to Richard Goyder, but the time might also be right for a spot of stable cleaning.
A whiff of might happen in the Wesfarmers stable came with a management shuffle at the Bunnings hardware business. Chaney made the announcement, but Goyder’s fingerprints would have been on the switch because he will want everything in order by the time he slips his feet under the chief executive’s desk on the 12th floor of Wesfarmers House.
Other changes could be more dramatic, with some of the operating assets of Wesfarmers failing to inspire as much confidence as the coal, gas and insurance businesses. A 50 per cent stake in Australian Railway Group is particularly uninspiring and management will soon be asking questions about whether it can clear the Wesfarmers performance hurdles of return on capital and earnings growth. Forest products is all but gone, with only a 50 per cent stake in the Wespine sawmill at Dardanup left, and that has to be for sale.
In keeping with the steady-as-she-goes style of Chaney there will probably be no dramatic shake-up, or sudden write-down in asset values but a change of leader always brings a difference in style and the period before the handover is a good time to put your affairs in order so the new guy can look squeaky clean.
"It is always the best policy to tell the truth, unless, of course, you are an exceptionally good liar." Jerome K. Jerome.
