From an analyst’s point of view

OUT AND ABOUT: It’s hardly rocket science that when making an investment decision the regular retail punter requires research and information.

There’s no question there is a great deal of uncertainty in the marketplace at present so what should an investor be looking for when parting with their hard-earned readies?

Speaking at the RIU Melbourne Resources Round-up, Patersons Securities senior resources analyst Simon Tonkin provided some insight into how the experts think.

 

“Obviously we are looking for a stock that has a quality resource project with high margins and good earnings,” Tonkin told his audience.

“We’re looking for a stock that has limited funding issues. In this uncertain market we like to see a solid cash position with limited debt.”

Tonkin said one important factor to consider was how the management of a company is aligned with shareholders and that the management team also has a strong track record.

“In the small resources space we actually like management to own a large shareholding in the company,” he continued.

“We think that really motivates them, especially when the market drops, to not dilute shareholders and run the company as if they do have all their wealth invested in that company.”

Other aspects for consideration when looking to invest are what Tonkin described as, “near term catalysts”.

These involve looking at what market movements may drive a stock higher or being aware of what events may be going to happen in the next couple of months that could drive the stock up or down.

“We don’t like companies that require a lot of funding, especially in this volatile market,” Tonkin explained.

“Projects with large capital expenditure requirements versus their market capitalisation – they really find it difficult to raise that capitalisation. They look for partners with deep pockets.”

Turning his attention to the different sectors collected in the resources envelope Tonkin said Patersons’ favoured sectors in the longer term are gold, copper, coking coal and uranium, while its least favoured at present are iron ore and nickel and rare earths.

“Gold is our preferred sector for the current macro environment,” he said.

“The key take-away is that gold equities have significantly underperformed to the gold price since around April 2011.

“We believe this is due to operational risks associated with mining.”

Gold is almost everybody’s commodity of choice these days.

There are a few analysts brave enough to deride its virtues, but nonetheless there has been a significant increase in bullion sales world-wide over the last few years.

According to the World Gold Council there has been a 70% increase in bullion sales to China, India and the Middle East.

“Given the diversion of the gold price and equities; either the gold price has to fall further or the equities are cheap,” Tonkin said.

“We would hope that it is the latter and it is important to be stock-selective.”

Casting a glance at base metals Tonkin described the outlook for this particular mixed bag to be varied.

Unsurprisingly China was again mentioned, this time to remain as the key driver to continuing support for the base metals.

Amongst these copper emerged as the analyst’s preferred pick due in part to a lack of new discoveries in the copper space.

“Grades are getting a lot lower,” Tonkin claimed.

“They were around 1.8 per cent in 1990; they are now 1.07 per cent in 2010.

“New projects are in riskier jurisdictions and the other thing that I like about copper is that the Chinese do not control the copper market, with 35 per cent of supply coming from Chile.”

World nickel supplies are shaping up to be in surplus for the next several years causing a number of nickel plays to be now focussing more on gold.

Because of this Tonkin suggested nickel companies could find the going tough over the next few years.

He was more positive, however, for the prospects for coal, especially coking coal.

“Most of the supply comes from Canada and Australia and these mines are getting deeper,” Tonkin said.

“China has moved from being a net exporter of coal in 2009 and is now the second largest importer of coal.

“New coal regions such as Mongolia and Mozambique will make a small difference but won’t make up the shortage.”

With energy in the frame Tonkin turned to uranium saying its demand appears favourable with China embarking on the largest reactor build in the last 30 years.

“China needs clean power,” he said.

“The World Nuclear Association is forecasting Chinese installed capacity to increase by 13 times to 136 Giga Watts by 2030.

“This would make China the largest nuclear reactor nation in the world.

 “Fukushima negatively impacted sentiment in the uranium market with equities falling around 48 per cent.

“We don’t believe equities can fall much lower without putting a lot of new supply at risk.”