Jittery investors have oversold stocks in response to the Japanese earthquake and turmoil in Libya, according to Mark Goulopoulos, associate director of Patersons Securities. Goulopoulos says the fallout provides opportunities in response to negative investor sentiment, but unchanged company fundamentals.
Astute investors make money from buying good quality stock at a discount. They buy against the trend for longer-term gains. The ASX was down almost 10 per cent from its February 17 high of 4944 points before a recent sharp rally. But Goulopoulos believes there’s a lot of upside left in his list of companies for those willing to stomach volatile times – at least in the short term. While not specific recommendations to buy, Goulopoulos believes any his choices possess the fundamentals and outlook to reward investors in the next year or two.
BHP Billiton (BHP)
The world’s biggest miner BHP Billiton announced a record $US10.52 billion interim profit for the six months to December 31, 2010, but that didn’t protect it from the recent sell off, with the share price retreating 11.4 per cent from its February peak. The off-market share buyback is currently open and is expected to receive strong support from self-managed and institutional superannuation funds. Goulopoulos says those who participate in the buyback will most likely look to re-enter the market and renew their BHP positions, which will support the share price. “The balance sheet remains exceptionally strong and earnings growth is likely to be robust with coal, iron ore, copper, and oil prices all at very high levels,” he says. “The stock is likely to be re-rated to a new all time high above $50 during 2011.”
Investors savage companies that fail to meet expectations and mining services company Bradken is no exception. The rail equipment maker’s interim net profit of $25.99 million for the six months to December 31, 2010 was widely viewed as disappointing and the share price was slashed 17.6 per cent from its peak in late January. In Goulopoulos’ view, the stock has been way over sold as nervous investors scurried for the exit. “The medium term growth profile for Bradken remains unchanged, with earnings being driven by mining volumes which are expected to experience strong growth over coming years,” he says. “The current share price offers clear value for medium to long term investors. It should provide strong capital growth supplemented by an attractive dividend yield.”
Woodside Petroleum (WPL)
The share price of Australia’s biggest listed oil and gas producer has risen during the sharemarket correction in response to a recent major gas discovery in Western Australia’s Carnarvon Basin. “Although, at first glance, this appears to be just another gas discovery for Woodside, the strategic implications are far more important,” Goulopoulos says. “Woodside has been seeking further gas to underpin the second stage of its very large Pluto project which, when it proceeds, will provide strong LNG production growth.” Goulopoulos says that prior to the recent discovery, there had been concerns that Woodside wouldn’t have sufficient gas for the LNG expansion and negotiations to buy third party gas had been slow. “The recent discovery will go a long way to confirming sufficient gas for the expansion, which is likely to lead to a significantly higher share price over the medium term,” he says.
Company and global economic outlooks are often cast aside when the selling contagion spreads among investors. Sell now and ask questions later is the investor mind set, perhaps with good reason given the effects from the global financial crisis are relatively fresh. But when the selling’s in full swing, cool heads make the best decisions. Goulopoulos concludes the Japanese earthquake and the turmoil in Libya are short-term and unlikely to have any lasting negative impact. Resource companies were hit hard recently and that’s where Goulopoulos is shopping. “The underlying demand and supply fundamentals are unlikely to change over the medium term due to these two events,” he says. “If anything, the rebuilding work in Japan is only likely to increase demand for resources over the next few years.”
Equinox Minerals (EQN)
Goulopoulos says Equinox Minerals operates the Lumwana copper mine in Zambia, which has been successfully ramped up and is now producing above expectations. The company aims to produce 145,000 tonnes of copper concentrate in 2011 and to expand ore production to 35 million tonnes a year by 2013. Equinox recently acquired Citadel Resource Group, and with it came the Jabal Sayid copper project in Saudi Arabia, which is expected to start producing in 2012. Goulopoulos says: “In a much bigger move, Equinox made a takeover bid for Canadian company Lundin Mining Corporation several weeks ago for C$4.8 billion in cash and shares. The share price has fallen significantly since this bid as the market was clearly concerned about Equinox taking on a high level of debt. Whatever the outcome of this transaction, Equinox is a big copper producer, with planned strong growth in a copper environment offering a bright outlook.”
Extract Resources (EXT)
Uranium stocks were pummelled following the Japanese earthquake and subsequent tsunami that crippled the Fukushima nuclear plant. The future of uranium as an energy source continues to be widely debated, but with hundreds of nuclear reactors across the world amid plans for new ones, Goulopoulos says demand for yellowcake over the mid to long term will remain strong. He says uranium is a viable energy alternative in meeting the growing energy needs of emerging economies, such as China, India and Russia. Extract Resources has rapidly taken its Husab Project in Namibia from exploration phase to containing the fifth largest uranium resource in the world. The project, which is next door to Rio Tinto’s Rossing Project, offers considerable upside potential. Corporate activity is also in the air. Goulopoulos says Kalahari Minerals announced it was expecting a takeover bid from Chinese firm CGNPC Uranium Resources. As Kalahari Minerals owns 42.8 per cent of Extract Resources, investors speculated on whether Extract Resources would also be acquired. As a result, the share price of Extract Resources jumped to a high of $10.80 a share prior to the Japanese earthquake. “There’s now clear value on offer in what is likely to be one of the largest uranium miners in the world, or an acquisition target at a much higher price,” he says. Extract’s share price closed at $8.30 on March 23, 2011.
Orocobre owns the Olaroz Lithium-Potash Project in Argentina, which is soon to enter the stgelopment phase as a major new producer of lithium and potash. Goulopoulos expects strong demand for lithium and potash. Lithium is in batteries to power electric cars and other electronic stgices, while potash is used for fertiliser to maximise crops as demand for food increases in line with increasing wealth in China and India. Goulopoulos says Orocobre is likely to become a major player in both markets via its Olaroz Project and its nearby Salinas Grande Lithium-Potash Project, which has unearthed positive initial exploration results. He says recent price weakness, where the stock has fallen from $4 to $2.70 on March 23, 2011, “offers a very attractive entry price”.
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Price current to market close, April 1, 2011
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