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Callum concedes: Shae might be right

Callum concedes: Shae might be right

A line from Jim Carrey’s movie The Mask sums up the financial world nicely right now…

You can’t make the scene if you don’t have the green.’

Here’s talking about his friends Franklin, Hamilton and Jefferson. In other words, the US dollar!

It never pays to be too certain about anything in the financial markets.

I’ve made the case at times this year that the Aussie dollar could surprise to the upside. My theory was that this was going to be thanks to high commodity prices and a good trade showing.

We’ve got the strong prices, and Australia posted another trade surplus in August.

That’s largely thanks to LNG exports to Asia firing up.

But there’s apparently no stopping the US dollar at the moment…

The Aussie is now hanging grimly above 70 cents.

My colleague Shae Russell might be right. We’ve gone back and forth over this in the office a few times.

Shae kept making the case that the higher interest rates in the US would keep pulling capital towards America.

The market is backing her view as I write this.

As I see it, one sector stands to benefit from this dynamic…

It’s nice to get paid in US dollars right now

I’m talking about Aussie mining stocks.

As above, commodity prices are strong already. But the weakness in the Aussie dollar boosts the margins most miners can earn even further.

Gold is a good way to see this.

The US dollar price of gold is US$1202 an ounce.

The Aussie dollar price of gold is AU$1694 an ounce. And this has taken a big lift in the last few days as the currency gets smashed down.

Actually, you’ll notice the effect of this dynamic next time you fill up the car.

Petrol gets more expensive every time the Aussie dollar shifts down.

A barrel of Brent crude is currently around A$120 for us. Ouch!

What hurts at the bowser is not so bad if you happen to be getting paid in US dollars, as firms like BHP do.

BHP hit new 52-week highs this week.

That’s a marked changed from early September, when the stock was looking decidedly weak.

I’ve attributed some of the recovery to improving sentiment around the ‘trade war’.

But the US dollar must be playing a part here, too.

The more this continues, the better the outlook for natural resource stocks.

One of the shares on my Small Cap Alpha buy list is a mining services company. It released some early numbers around its first quarter revenue for the new financial year.

It’s well up on the same time last year. Miners are back spending, incentivised by good cash flows.

Certainly, this suggests there’s lots of drilling and exploration happening out there at the moment.

There’s more good news for the mining sector, too…

Cash is pouring out into these companies

BHP says China’s One Belt, One Road initiative could boost copper demand by 1.7 million tonnes, or 7% of current annual demand.

That number may even be conservative.

This comes back to a familiar theme for me.

Demand for copper is not going to go away. A rising global middle class ensures that, not to mention its bigger role in electric cars and renewable energy.

But, long-term, copper is getting harder to find at good grades and no longer as accessible as it once was.

Events like the recent spat between China and the USA might knock the winds out of the price from time to time.

But there’s going to be lots of opportunity around here.

That’s true of the natural resource sector in general.

The Australian reports that Queensland gas drilling is back to boomtime levels.

LNG exports are going at record rates.

This is going to incentivise firms to keep drilling new gas wells in Australia to meet the demand for both exports and cash in on the high domestic prices down the east coast.

That’s how markets work.

All this means we could see some really strong earnings come in over the next 6 months across the whole sector.

This could make the ASX a very exciting place to be hunting speculative opportunities.

Mining stocks can really zoom when the good news comes in. There’s nothing like a big discovery to send a stock flying up.

A junior explorer can only go and find a new deposit if it can raise the money to go looking in the first place.

That funding is available. The results from my mining services stock and recent reports on exploration spending confirm it.

An engineer I met at a recent conference thinks the NSW and Melbourne property booms have a part to play here, too. There’s some risk capital shifting from that market to the mining sector, in his view.

I see no reason to disagree with it.

This is setting the stage for some very positive announcements in the near future.

Over at my service, Profit Watch, I’ll be keeping an eye on some of the most promising juniors in Aussie mining.

Regards,

Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia