Sifting out long-term growth stocks offering potential corporate appeal leads to the resources sector, according to analysts. Three analysts have put forward six stocks they believe have the asset firepower to survive a commodity slowdown, but are more likely to prosper from demand for their resources. They argue the mining boom is sustainable as emerging economies, such as China and India, continue to urbanise and produce, and any signs of an improving global economy could further heighten demand for commodities. Potential big suitors here and abroad are always on the hunt for targets to secure supply. The recent sharemarket correction is likely to lead to more industry consolidation, as the mining giants smell opportunities at bargain prices.

Atlas Iron (AGO)

 

Chart: Share price over the year to 02/09/2011 versus ASX200 (XJO) 

Continuing strong demand for iron ore paints a bright outlook for Atlas Iron, according to Richard Batt, of Shadforth Financial Group. The market capitalisation of the Pilbara-based explorer and producer has soared from a mere $9 million since listing in 2004 to more than $3 billion today and inclusion in the S&P/ASX100. The company has expanded its operations after acquiring Warwick Resources, Aurox Resources and Giralia Resources, all delivering tenements and increasing the resources base. Atlas recently announced a full year net profit after tax of $169 million and declared a maiden dividend of 3 cents a share. It shipped 4.6 million tonnes of iron ore for the 12 months to June 30, 2011, and is targeting exports of 6 million tonnes in 2012 from increasing production. Revenue of $85 million in full year 2010 rose to $585 million in 2011. The company ended the year with a cash balance of $366 million. “Atlas has an excellent track record of resource growth, and with strong cash-flows and no debt, it’s an ideal investment for long term portfolios,” Batt says. He says what would make Atlas Iron appealing to suitors are its growing resources, location, the high iron ore price, profit, prospects and its proximity to Port Hedland in Western Australia.

Whitehaven Coal (WHC)

 

Chart: Share price over the year to 02/09/2011 versus ASX200 (XJO) 

Whitehaven Coal’s four open cut mines and another underground mine produced 4 million tonnes of saleable coal in 2011. Batt says the company expects to sell 16 million tonnes by 2015, citing strong demand. “The company has been profitable every year since it began production in 2000,” he says. “It recently announced a 33 per cent increase in an underlying net profit after tax of $73.3 million (before significant items) for the year ending June 30, 2011.” Batt says demand for metallurgical coal will account for an increasing proportion of sales, boosting revenue and margins. Developing the Narrabri and Vickery mines offers the advantage of being close to existing infrastructure and operations and will boost future earnings. Batt says that in 2009, Gloucester Coal launched a takeover bid for Whitehaven, which collapsed following Noble Group’s bid for Gloucester. He says that in October 2010, Whitehaven announced a formal process to enable parties to submit proposals for a potential corporate transaction with the company. The process ended in April 2011 without a deal. “Recent bids for Macarthur Coal and Coal & Allied means Whitehaven may be looked at again,” he says.

Beach Energy (BPT)

 

Chart: Share price over the year to 02/09/2011 versus ASX200 (XJO) 

One-off impairment charges of about $158 million relating to its mothballed offshore gas project in Victoria contributed to Beach Energy posting a $97.5 million loss for the 12 months to June 30, 2011. But stripping out impairment charges enabled the company to report a full-year underlying profit of  $41 million, up 7 per cent on the previous corresponding period. Sales revenue was up 2 per cent to $498 million, mostly driven by improving oil and gas prices. The Cooper Basin produced most of its 6.6 million barrels of oil equivalent. Batt sees potential in Beach as it focuses on stgeloping its non-conventional shale gas opportunities, saying it’s classified as one of the first movers in the field. “The company recently announced a strong resource estimate for two of its shale gas wells in the Cooper Basin,” he says. “The estimate is likely to be just the beginning of more to come for the company. If successful in converting unconventional resources into gas reserves, shareholders will benefit.  Beach has about $173 million in net cash.” Batt says BHP Billiton’s purchase of US gas shale producer Petrohawk Energy for $US12.1 billion heightens interest in extracting natural gas from underground shale formations. Beach could easily draw predator attention depending on its success.

AWE Limited (AWE)

 

Chart: Share price over the year to 02/09/2011 versus ASX200 (XJO) 

Paul Clarke, of State One Stockbroking, says what mining suitors examine are the quality of the target company’s projects, the company’s reserves, their proximity to infrastructure, balance sheet status, whether it’s an explorer or producer, its prospects, the outlook for commodities and price. If enough satisfy the suitor’s criteria, it may launch a takeover bid. Oil and gas explorer and producer AWE Limited recently reported a full-year loss of $117.6 million, but significant one-off items impacted the result. Looking forward, Clarke says the company has strong oil and gas reserves, and offers six main producing assets in Victoria, Western Australia, New Zealand and the US state of Texas amid exploration interests. “AWE’s gas assets have production lives of around 20 years, making the stock attractive to potential suitors,” he says. “Strong potential in shale gas complements existing quality assets. The current languishing share price could flush out predators looking to enter the Australian shale gas space at an early stage.”

Discovery Metals (DML)

 

Chart: Share price over the year to 02/09/2011 versus ASX200 (XJO) 

Clarke also likes Discovery Metals from a near term producer point of view. He says the company’s Boseto project in Botswana is expected to produce 36,000 tonnes of copper and about 1 million ounces of silver a year for more than 15 years. He expects production to start within months. He says results from a recent drilling program were most encouraging after revealing a 25 per cent increase in the mineral resource to 44.1 million tonnes at 1.3 per cent copper. Infill drilling showed a 56 per cent increase in the measured and indicated categories. “Copper prices have remained relatively steady,” he says.  “But even a copper price dip still makes Discovery an attractive takeover play, based on its exploration results and reducing risk as it moves from a stgeloper to a producer.”

Paladin Energy (PDN) 

 

Chart: Share price over the year to 02/09/2011 versus ASX200 (XJO) 

Shawn Uldridge, of William Shaw Securities, says the out-of-favour uranium sector offers long-term growth prospects, with Paladin Energy his prime choice despite a net loss after tax of $US82.3 million for 12 months to June 30, 2011.  Revenue increased to a record $US268.9 million on the back of increasing uranium sales and higher realised prices. Paladin’s Langer Heinrich mine in Namibia is its flagship, but it has other quality uranium deposits, such as the Kayelekera mine in Malawi.  Uldridge says Paladin projects, with mine lives up to 20 years, have uranium reserves amounting to 220 million pounds. “It also has projects in stgelopment with resources estimated at that much again,” he says. “This is a long term growth story.” Uldridge says Chinese companies have swooped on the global uranium sector and have been behind strong merger and acquisition activity since January. “China is looking to shore up uranium supplies as it plans to build another 60 nuclear reactors between now and 2020,” he says. “Paladin has the resources to contribute to Chinese demand.” Uldridge says Paladin’s share price has fallen about 65 per cent since the Japanese earthquake in March led investors to sell uranium stocks and avoid the sector. “I believe Paladin, at today’s price, appeals as a potentially strong takeover target as it produces what China and other nuclear powered economies need in future,” he says.

COMPANY CODE ACTIVITIES SHARE PRICE CLOSE
Atlas Iron (AGO) Iron Ore $3.81
Whitehaven Coal (WHC) Coal $5.99
Beach Energy  (BPT) Oil and Gas $1.11
AWE Limited (AWE) Oil and Gas $1.15 
Discovery Metals (DML) Copper and Silver $1.42 
Paladin Energy (PDN) Uranium $1.995

Price current to market close, 2 September 2011

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