Leading Indicators for Mining Stocks – Part 1
This is the first installment of a three-part special on the leading indicators for mining stocks, brought to you by our research department.
The markets have been difficult in recent times as the bulls and the bears have been wrestling for control. We have identified some leading indicators that will give investors an edge in identifying the potential direction of the specific share price movements.
The materials sector has continued to underpin the performance of the broader Australian market. It lead the recovery back in early 2009, but has weighed on the markets as a result of the uncertainties from the proposed Resources Super Profits tax.
Sentiment in the mining sector has started to recover and Merger & Acquisition (M&A) activity has picked up since the Government’s reinvention of the RSPT to the watered down version – the Minerals Resource Rent Tax (MRRT).
Commodity prices can be used as a leading indicator for share price movements. We have reviewed key mining stocks that are highly liquid and respond well to movements in commodities. Please note that the commodity prices are recorded in Aussie dollar terms.
BHP Billiton Limited (BHP)
BHP is the world’s largest diversified resources company and is primarily driven to service Asia. BHP is a well managed global resource leader with a balanced portfolio of world class, long life assets and a full suite of conventional energy products. It prides itself on having low cost operations and a strong balance sheet. Most of its revenue comes from the relatively stable economies of Australia and NZ, North America and Europe.
Copper has also been a highlight this week breaking to new monthly highs, with the last trading being above the key $US3.00 a pound at $US3.1675. Copper is considered a bellwether for underlying economic strength and this is a positive for BHP.
The chart below illustrates how closely correlated copper and BHP are. The chart shows that back in early 2008 the copper price foreshadowed a pullback in the BHP share price by about six weeks. While in early 2009 the copper price gave a confirmation of turn around in BHP’s share price.
The correlation has held throughout 2009 to 2010, however for the year-to-date the copper price has not offered a leading indication for the BHP share price. This may be about to change with the copper price breaking to new monthly highs, indicating BHP could be setting up for another run higher.
Commodity prices can be used as a leading indicator for share price movements, however you need to convert the pricing to Aussie dollar equivalents for the best results. Note that it’s important to check the US ADRs for overnight share price movements as well.
Look out for the second installment of this three part special next week, when we take a look at Newcrest Mining Limited (NCM). To make sure you don’t miss out, sign up to receive our weekly newsletter.
By Michael Hevern
Head of Research
The information provided within this blog is general advice only and you should consult the services of a financial professional in order to ascertain whether the information is applicable to your investment strategies and risk profile.