Australian Mining Sector Set for Strong Year in 2007

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Who said the commodities boom is over?  We didn’t.  Although we think there have been one or two grizzly commodity bears out there.  More on that in a minute.

Last week the All Ordinaries put on a reasonably healthy 1.1% and yesterday it added another 0.7% to take the index to another record breaking score to finish the day at 5,649.

Resource giants BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) edged up even further with BHP gaining by 4% for the week and Rio by 4.6%.  But much better than that was energy company and corporate governance role model Alinta (ASX: AAN) which beat the lot of them by gaining over 18% for the week.  In Monday’s trade it managed to add another 2.7% for good measure.

Overseas, the Dow Jones Industrial Average has been resilient to almost everything, also surging on to record levels.  The index gained by 1.3% to again finish above 12,500 points.  Can anything stop it from reaching 13,000 points?  And if it does reach 13,000 so soon after getting to 12,000, will the euphoria compound so that the market hurtles to 14,000 then 15,000 then 16,000?  What about 20,000?  Funnier things have happened before.  By the way, this isn’t a prediction for the Dow to go to 20,000 points.  The Australian sun hasn’t had that much of an effect on your correspondent yet.

Back to the domestic scene.  Resources stocks have had a fairly turbulent time of it following falling global commodity prices, including oil, copper and zinc.  Even so, or perhaps because of this, there are other commentators that are prepared to back the continuation of the commodity bubble.

Unnamed resources analysts from brokerage Ord Minnett have been to Perth and have come back happy, no, more than happy… delirious even, with what they have seen.

Their research note starts off by saying, “Stronger for longer – this continues to be the prevalent theme for the mining services sector with most companies speaking of high visibility and sustained growth for at least the next three years with some quoting that they has [sic] some comfort that the current growth would be around for at least five years.”

Perhaps unusual for a research report, the analyst decided to pass on comments made by the management they had met about their own personal investment choices.  The common theme?  “Buy BHP” says the report, “… a number of companies visited do significant amounts of contract work for BHP and on more than one occasion the CEOs indicated that they were buying BHP for their own personal account.”

Are we in danger territory basing investment decisions on the actions of a bunch of unnamed West Australian resources guys?  Hmm.  On the plus side one would think ‘well, they should know.’  On the downside, is it just bravado?

It isn’t just the big guys that Ord Minnett likes, the smaller mining companies come in for some attention too.  Three of their favourites: Imdex (ASX: IMD), Mineral Resources (ASX: MIN) and Nomad Building Solutions rate as their ‘must-haves.’  Although the reasoning for Imdex appears a little shaky at first glance with the comment “While I’m reluctant to recommend a stock without having done all the necessary work and modelling, every now and again by chance or good fortune you stumble across one that is an absolute ‘no brainer.'”

Perhaps he/she does themselves a little bit of an injustice.  Further reading of the report suggests they haven’t just thrown a dart at a board or picked a number from a hat.

Not only are the analysts falling over themselves for the resources boom, but the mainstream media is as well.  Alan Kohler in his Eureka Report said yesterday, “Seat belts on for a strong year.’

Kohler says at the end of his column, “Should we buy more BHP shares now that they are down? Well, personally I’ve got enough already; it is the foundation of my portfolio and I’m not selling. It is still a great company and it is still has sustainable scale and advantage in a business that is underpinned by long-term demand growth.”

Now that we find very difficult to disagree with.

Kris Sayce
for The Daily Reckoning Australia

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.
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