For years we have all known the commodities boom was largely driven by Chinese infrastructure spending and their seemingly insatiable demand for that which we have in abundance – iron ore.

Our mining troika of Rio Tinto, BHP Billiton, and Fortescue Metals have rewarded shareholders richly and benefited numerous companies that provide services to them.  What began as a hushed whisper that the mining boom might be slowing down swelled to a cry that it might be over and now we hear a deafening chorus of opinion claiming it is over.

When you couple this with a potentially troubling property market, declining consumer confidence, and global macroeconomic nightmares, you get what we have seen in recent days – irrational panic selling in equities markets.  Despite the fact that research shows that equities outperform fixed income investments over time, money is flowing out of equities at an alarming rate.

Yet every retail investor has heard time and time again that fortunes are made when there is blood in the streets.  Where are the investing opportunities right now?

The Miners

Conventional wisdom says the miners will fare the worst from the expected China fallout.  Market participants agree, as evidenced by a three month share price movement chart for our big two – RIO and BHP:

However, major analysts at firms like Deutsche Bank, UBS, and CITI are maintaining their BUY ratings on both BHP and RIO in broker recommendations issued in April and May 2012.  Fortescue Metals, as our only pure iron ore play, is the only one of the Big Three Miners to earn a broker SELL recommendation.

The following table shows share price range year over year for the Big Three:

Company

Code

Share Price

52 Wk Hi

52 Wk Lo

P/E

P/EG

BHP Billiton

BHP

$31.99

$45

$31.01

9.08

.88

Rio Tinto

RIO

$56.36

$84.53

$54.50

7.18

.97

Fortescue Metals

FMG

$4.48

$6.77

$3.95

8.55

.46

 

All three of these companies hit new 52 Week Lows earlier in the trading week of May 21st, yet their Price to Earnings and Price to Earnings Ratios suggest they are cheap.  Conversely, some believe they represent classic value traps, as the shares have yet to reach bottom.

You would be hard pressed to read an article about the mining slowdown here that does not cite American investor Jim Chanos who is aggressively shorting FMG.  Chanos gained fame for noting the impending doom of Enron while others clung to the belief that stock could do no wrong.

There is something wrong with this picture that is difficult for the average retail investor like you and me to figure out.  If indeed the sky is falling in on the mining boom, why are both FMG and RIO plowing ahead with expansion plans?  While BHP has announced it will be slowing down its expansion, they have yet to release details as to where and how.  The world’s largest iron ore miner, Brazil’s Vale, is also planning to proceed with expansion plans.  Do they know something we don’t or are they just not that bright?

At an investor conference held in Rio de Janeiro in the week of 21 May 2012, a Vale spokesperson claims they are still selling iron ore as fast as they can get it out of the ground.  A Goldman Sachs mining analyst, Marcelo Aguiar, sees an average price for iron ore of around $150 per metric tonne for the remainder of this year with the price rising to $165 in 2013.  In his opinion, the current price of around $130 a ton reflects excess Indian capacity and over stocking of inventories in China. 

In response to the growing economic evidence of the storm brewing in China, outgoing Chinese Premier Wen Jiabo is calling for new measures to spur growth.  Based on past history, experts anticipate economic measures the Chinese government will put in place could favor steel and thus iron ore consumption.  Reuters News Service in Shanghai is already reporting that a state backed Chinese newspaper released news that the Chinese government will fast track approvals for infrastructure investments to stimulate economic growth.  Remember some experts have predicted a hard fall for the Chinese dragon for some time and it has yet to happen.

Value play or Value trap is the question you should ask yourself about the miners.  The value trap argument is fueled by the daily whipsawing reaction to market news about Greece and the rest of the Euro zone and on and on.  But remember, people like Chanos have a vested interest in doom and gloom spin – they stand to profit handsomely if they are right. 

While high risk-takers might want to place their bets with iron ore company executives who seem to know something that prods them to push on with expansion, there are other opportunities out there for the more risk-averse.

Oil and Gas Producers/Explorers

There is one resource China and other major Asian nations are looking to for relief from the pollution stemming from coal-fired electrical generation plants.  That resource is natural gas that can be imported in a liquid state – LNG (Liquefied Natural Gas).  You have probably heard the predictions of an impending “golden age of gas” and Australia could see LNG usher in a new resources boom that could make us look back at the iron ore boom as only one step in profiting from our abundant natural resources.

There are three major Australian players in this sector and all have big exposure to oil production and exploration as well.  Here are three companies whose shares have been dragged down in the panic.

Company

Code

Market Cap

Share Price

52 Wk Hi

52 Wk Lo

P/E

P/EG

Woodside Petroleum

WPL

$25,632M

$31.11

$46.75

$29.76

14.16

.81

Santos Ltd

STO

$11,357M

$11.92

$14.88

$10.11

21.04

3.06

Oil Search Ltd

OSH

$9,053M

$6.80

$7.55

$5.43

45.16

10

 

At first glance it would appear that OSH is significantly overvalued, yet analyst opinion disagrees.  In the most recent broker recommendation (23 May 2012), Citi upgraded OSH to BUY from Neutral, citing an improving story in their involvement in the PNG LNG project in partnership with Exxon Mobil.  Since 20 April 2012 seven other major analyst firms have chimed in, all with BUY, OUTPERFORM, or OVERWEIGHT recommendations.  The JP Morgan Chase recommendation was an upgrade from NEUTRAL, citing again the progress in the PNG LNG project.  Here is how market participants have viewed OSH over the last six months:

Note the share price has dropped in the last several weeks with no apparent change in company fundamentals.  While there is nothing certain in equity markets these days, it would appear the dip is due to market news and represents a potential buying opportunity.

The picture is less clear with the other two players, especially Woodside.  There have been delays in the start up of their Pluto LNG project and the news of the commencement of production has not been enough to counter the general market panic selling.  Here is a six month chart for WPL and STO:

If you believe in the golden age of gas, these companies are worth a look.  While the more cautious among you may wish to wait for a bottoming process once the next chapter in the Euro zone horror story unfolds, all three of these companies merit at least a place on your watch list.  With Greek elections in the offing and debates over some form of Euro-bonds in the news, share price volatility is not going away.

Telecommunications

The National Broadband Network is on its way and recent events have cleared away some of the uncertainty surrounding this massive undertaking.  You probably know the history of investing is filled with huge profits gleaned from technological advancements following a breakthrough communications network.  These three companies have weathered the market downturn better than most, although recent dips could be a buying opportunity for those who believe there is still money to be made in equity investments.  Here are the three companies:

Company

Code

Mkt Cap

Share Price

52 Wk Hi

52 Wk Lo

Div Yld

P/E

P/EG

Telstra Corp

TLS

$43,924M

$3.53

$3.75

$2.69

7.9%

12.96

1.59

TPG Telecom

TPM

$1.365M

$1.72

$1.92

$1.23

2.9%

12.71

1.43

M2 Telecom

MTU

$3.24

$3.24

$3.62

$2.27

5.1%

11.52

.37

 

Telstra is the biggest player here and now freed of their copper networking infrastructure; the company is well positioned to take advantage of its sheer size and scale.  Analyst recommendations in recent days are mixed, with 4 HOLDS or NEUTRALS and 4 OUPERFORMS or BUYS.  The issue appears to be competitive threat from emerging players in the new world of the NBN.  Investors, however, perhaps attracted by the dividend yield, think otherwise.  Here is a six month share price chart for TLS:

Telstra has already begun transitioning for the changing world.  Recently the Australian Competition and Consumer Commission (ACCC) approved the merger of Pay TV provider Foxtel (50% owned by Telstra) and Austar United Communications.  On 23 May 2012 Telstra announced the unveiling of its new online music called MOG. 

Smaller players TPM and MTU are two stocks to watch as the NBN impact begins to be felt.  TPG Telecom is a low price leader whose aggressive CEO has hinted at going after Telstra’s market share through increased acquisitions.  MTU is another small player making some noise.  They recently acquired established provider Primus Telecom, adding about 165,000 customer contacts in addition to Primus brand names and technological capability.  The cost of the acquisition, however, sent share prices into a tailspin.  Here is a six month chart for both companies:

Health Care

In theory, health care providers should be ports in a storm of market panic but in practice concerns over government regulations of the health care industry sometime cloud the picture.  However, there is one health care provider that has been repeatedly making new 52 Week Highs over the last month or so while ASX stalwarts like BHP were making new lows.  The company is Ramsay Health Care.  Here is how their share price performance compares to the ASX 200 Index the XJO over the last crucial three months:

If you have had RHC on your watch list and have been trying to find the catalyst for this upward trend, there doesn’t appear to be one.  Ramsay is the largest private hospital operator in Australia with only two OVERWEIGHT/OUTPERFORM recommendation from major analyst firms Macquarie and JP Morgan.  RBS Australia and Citi advise their clients to SELL while other houses are NEUTRAL or HOLD.  So what is going on with RHC?  Could it be some investors see safety in health care considering the upcoming influx of Baby Boomer retirees?

Here is another three month chart, this time comparing Ramsay with the ASX Health Care Index, the XHJ:

So there you have it.  The obituary for the mining boom may be somewhat premature; natural gas may turn into gold; the NBN may ignite technological breakthroughs the likes of which we have yet to even dream; and finally, people will still get sick no matter what happens in China or Greece.  The opportunities are there for the bold, you have only to take your pick.

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