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838 ways to work your stocks – ranking favoured resource shares on the way back up?

As resource stocks begin to recover, some are more favoured than others (coal, nickel, Tier II gold, uranium, copper), down to the least wanted (zinc, tin, moly, silver, platinum).

Author: Barry Sergeant
Posted: Thursday , 30 Oct 2008

JOHANNESBURG -

Over the past two-and-some days, the world's top 20 mining and top 20 oil stocks have clawed back nearly USD 400bn in market value; the top 20 mining names now have an aggregated market value of USD 1.1 trillion, while the top 20 oil names are worth USD 2 trillion.

Measured on a weighted basis, stock prices for the biggest mining stocks are 68% off highs, on average, but, at the same time, have risen a significant 31% from lows. This is the point of interest, for investors who - for whatever reasons - reckon that equity markets have bottomed. For the top 20 oil stocks, the numbers compute at 51% off highs, and 30% above lows.

The weighted price-to-earnings ratio for the top 20 mining names is now just six times, which is cheap by historic standards, and contributes at least in part to the recent distinct interest shown by investors in hunting for bargains in an atmosphere where - apparently - some semblance of sensibility has returned to global markets.

Looking more broadly at portfolio flows towards and away from 838 resources stocks listed across the world indicates clear trends as to which sub-sectors are most, and least, favoured by investors, at least at this juncture. It would hardly be a surprise to investors with an eye on resources that coal stocks (specifically those listed outside the Asian region) dominate returns, when measured from low stock prices, among global resources.

Performance here is somewhat distorted by the pricing for Fording, which is in the final stages of being swallowed up by Teck. However, a sound fundamental outlook for coal remains supported by investors, with a number of established coal miners continuing to trade well above stock price lows. Coal names to watch include Consol Energy, Massey Energy, Alpha Natural, New Hope, Alliance Holding, Penn Virginia, James River Coal, and Western Canadian. Smaller names to watch include Grande Cache, Waratah Coal, and VorkutauGol.

Nickel equities appear very attractive to bargain hunters. Dollar nickel metal prices rank as among the most heavily sold off of all commodities, currently trading at five-year lows. This continues to leave the door open to the possibility of mine closures, and delays or cancellations of new capacity. The nickel market is small, compared to copper, aluminium and zinc, and thus more sensitive to changes on the supply side.

The nickel subsector is dominated by Norilsk and Eramet, which are, in any event, diversified miners. Large quantities of nickel are also produced by top 20 mining stocks such as BHP Billiton, Vale, and Xstrata. Looking, however, at more specialised miners, it can be noted that on Thursday alone, stock prices for Albidon and Minara Resources each increased by 33% in a single trading session. Following the especially hysterical selling recently associated with Russia-listed stocks, Norilsk is now a massive 80% off its recent lows.

Tier II gold stocks are also eagerly sought by bargain hunters. Where Tier I names, led by Harmony, currently trade 25% above low stock prices, on average, Tier II names are trading 42% higher, led by JSC Polymetal, High River, Eldorado, Red Back, Iamgold, and Golden Star.

Investors are also flocking back into uranium stocks, among the most bombed out in the broader resources sector, and characterised by dozens of junior and exploration stocks. In Wednesday's trading session alone, the stock price of Calypso Uranium increased by 71%. Among more serious stocks, the sector is led by ERA, and also Uranium One, which finally decided last week to halt cash burn at its Dominion operation in South Africa by announcing a care-and-maintenance programme.

Among developers, strong leadership comes by way of Forsys and Hathor Exploration, underpinned by the performances of associates Extract Resources and Kalahari Minerals, now essentially members of the Rio Tinto stable.

Investors are also snapping up perceived bargains among copper equities, led by Southern Copper, Antofagasta, Polska Miedź, First Quantum, Pan Australian, and Northern Dynasty. During Wednesday's trading session, Frontera's stock price gained 44%.

Some investors have also been moving portfolio flows towards listed diamond stocks, dominated by Gem Diamonds, and Harry Winston. Tier I iron ore stocks - encompassing three giant mining stocks in Vale, Rio Tinto, and BHP Billiton, have also been well supported lately, along with potash producers, led by PotashCorp, Mosaic, and Uralkali.

Iron ore developers have also attracted attention; on Thursday, Murchison's stock price jumped 57%.

Mining equity subsectors least favoured by investors right now include coal stocks listed in Asia, along with names associated with molybdenum, zinc, tin, and silver. Tier I gold and Tier I platinum stocks are only in modest demand. Mining and energy stocks listed in Asia appear to be more victims of post bubble equity markets in China. That bubble burst well before the global markets crisis that poured hellfroth across the planet, starting 15 September 2008. Where the Morgan Stanley Capital International dollar index for global equities is currently 45% off its highs, the Shanghai Composite stands at 70% off its highs, recorded 12 months ago.