Leading Indicators for Mining Stocks – Part 2
This is the second installment of a three-part special on the leading indicators for mining stocks, brought to you by our research department.
As mentioned in our first installment, the stock 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.
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.
Last week we reviewed BHP and now continue by examining a premium gold stock, Newcrest.
Newcrest Mining Limited (NCM)
Newcrest (NCM) is the highest quality, low cost gold producer in the Australian market, with positive growth and strong exploration upside.
Until the recent proposed merger with Lihir Gold, almost all its value has come organically through exploration. Newcrest is predominantly Australian based, offering low sovereign risk and its trades have much lower multiples than its overseas peers. Newcest is reported to be a perennial takeover target, though the strong performance of current management should deter any would-be acquirers.
The Gold price has pulled back nine percent from its recent all-time highs and is continuing to show weakness, trading below its 50 and 100 day moving averages, last trading at $US1,160.40 an ounce. This week Gold has broken key support levels.
The chart below illustrates how closely correlated Gold and NCM are. The chart shows that back in late 2008 the gold price foreshadowed a recovery in the NCM share price by about six weeks, while in early 2009 the gold price gave a confirmation of turnaround in NCM’s share price, as it did again in late 2009.
The correlation has held tight throughout 2009 to 2010, however in the past quarter the gold price surged ahead, but NCM share price did not follow. This may be because of the volatile Aussie dollar moves and the proposed merger between Newcrest and Lihir. The Gold price is currently under pressure as investors are looking to liquidate their gold positions in order to add risk to their portfolio. This will be a negative for our gold stocks near term. Once the merger with Lihir is bedded down, we would expect the strong correlation between the gold price and Newcrest to resume.
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. We have reviewed key mining stock(s) that are highly liquid and respond well to movements in commodities. Note that it is important to check the US ADRs for overnight share price movements as well.
Look out for the third 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
You can receive more fundamental information on Newcrest Mining on our website.
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.