It’s a scorcher of a summer here in the Northern hemisphere… but all the red-hot action in investment markets is back in Australia. Thirty four times the All Ordinaries have closed at an all-time high this year. Yesterday was not one of those times. But it was close.
And today? Well, Brent crude futures went past US$76 in London trading on Monday. The all-time high is US$78.64. High oil prices are long-term economy killers. But they also deliver profits to energy stocks, and that’s where you should see some activity today in Aussie shares.
But there’s no doubt the mining shares are getting all the ink and all the analyst love. Analysts at Credit Suisse tipped Rio (ASX:RIO) to reach AU$125 per share in the next two years in a report made public yesterday. And the outlook for BHP (ASX:BHP) is just as rosy.
Credit Suisse (NYSE:CS) sees BHP eventually at AU$50 (it closed yesterday at AU$38.33). The report concluded: “Mr. Kloppers will continue on growing BHP’s core assets: Escondida, iron ore, Olympic Dam, Cerro Matoso, coking coal and petroleum, which offer long-life, low-cost, high margins for shareholders.”
Margins are high partly because prices are rising. Just as iron ore prices rose by an astonishing 75% in 2005, Credit Suisse reckons coking coal prices could rise by as much as 49% to US$115 per tonne next year. And iron ore prices themselves could be in for another 25% rise, according to the report.
Those kind of sustained price increases without any fall off in demand have led more people to embrace the idea of re-rating mining companies. With evidence that this resource cycle really is stronger and may last much longer than previous cycles, analysts find it reasonable to pay larger-than-normal premiums for stronger-than-normal cash flows.
Whether it’s really safer in the long-run to pay more now for tomorrow’s earnings is a bit of an academic point today. The market has begun re-rating the mining stocks as if they were growth stocks, and not cyclical resource stocks. The analysts have a tendency to provide the rationale for a move that’s already happened anyway. But that means there’s probably room for an even bigger move in the resource stocks – especially with the influx of super cash waiting to be deployed.
And we’d be remiss if we didn’t mention the takeover premium being figured into share prices. Will Rio buy Alcan (NYSE:AL)? Will BHP buy Alcan? Will Oxiana (ASX:OXR) merge with Zinifex (ASX:ZFX)? Who’s buying what?
Investors don’t know who’s going to end up winning the big takeover battles in the metals mining sector. But they’ve already anticipated the action by bidding up shares. Up, up, and away!
And the website Mineweb puts it this way, “There is no doubt that the spate of mergers and acquisitions in the international mining sector will continue as long as there is so much excess cash floating around in the miners’ coffers. It is perhaps a moot point whether shareholders’ best interests are served by expensive take-over bids, or by returning this excess cash to them in other ways, but there is something to be said for the merger into a far bigger entity as providing, perhaps, some protection from the other predators in the sector.”
The Daily Reckoning Australia