In a note published this week, Citigroup Global Markets Equity Research wrote that, mining and metals stocks “are shifting from a period of dizzying M&A speculation, to the cold numerical reality of the 2Q earnings reporting cycle”. On a commodity by commodity basis, analysts John Hill and Graham Wark suggest investors should begin, “focusing on supply tightness and companies with high margins, low multiples and cash return catalysts.”
The Citigroup duo named Freeport McMoran as their top copper play, Nucor and Allegheny Technologies in steel; Peabody, Arch and Foundation in Coal; and Barrick in gold. Their focus was obviously on American shares. But Aussie investors will find equivalent, high-margin, cash- rich firms right here at home, too.
One interesting note from the two about coal. They wrote that “coal is struggling to find catalysts, and the equities have pulled back after a strong anticipatory run…Among the negatives now influencing coal prices are mild weather and share gains from cheap and abundant natural gas, which have kept coal stockpiles high into June.”
“Yet, we believe it is too early to call coal cooked, and expect a boom-bust-boom scenario,” Hill and Wark said. They added: “Our sense is that within three years the industry will be significantly consolidated, around the time that clean coal technologies began to harden and national energy shortages materialize. This should open a new chapter for coal.”
This fits with the consolidation going in the Aussie coal industry, too. Aussie coal, the thermal kind, keeps the lights on in Tokyo and Seoul. Aussie coal, the coking kind, keeps China at the top of the global steel producing heap, not to mention Korean giant Posco (NYSE:PKX).
But coal will probably begin to build an energy premium this year, as geological realties start to intrude on natural gas and oil prices, and as geopolitical realities keep the oil premium high. Coal – dirty or not, here it comes – is an economic substitute for oil and gas, especially when it comes to liquid fuels, which is where we’ve had our focus in the Australian Small Cap Investigator.
The Daily Reckoning Australia