Resources stocks excluding the energy sub-sector- outperformed nervous global markets on Monday, as investors flocked toward the sector after recent-profit taking, on concerns over high crude oil prices, and rising interest rates in the US.
These inflationary fears helped push gold to $478.50 an ounce on Monday, to the highest since January 1988. David Holmes at RBC Capital Markets said investors appeared to be uncomfortable with currency and bond markets. Holmes saw safe-haven hedge buying and, to some degree, a rally driven by inflation concerns. Beyond gold trading near an 18-year high on Monday, silver prices hit ten-month records and copper very much a China metal - rose to records above $1.82 a pound.
The buying of gold and broader resources started early after the weekend, in Australia, as UBS and Macquarie Equities recommended the resources sector, which also comprises a significant chunk of the JSE. The sector remained in good demand on the back of continuing investor demand for quality, broad-based resource stocks as highlighted on Monday morning by Numis Securities in London.
Investment analysts said miners were being upgraded on increased cash flow generation from higher metals and bulk commodity prices over the next six to 12 months. According to Numis, it seemed apparent that low inventories and continuing supply/demand deficits for key commodities may serve to maintain higher than previously forecast price levels.
Resources stocks have also benefited from a pull back in crude oil prices, given significant energy demands by most resources companies. On Monday, crude oil was trading higher by 1%, around $62.44 a barrel, on the New York Mercantile Exchange. The price, however, has pulled back - after doubling in the past two years by 12% from a record $70.85 on August 30.
Among individual stocks, analysts at Dresdner Kleinwort Wasserstein recently maintained a "buy" rating on BHP Billiton, the worlds biggest diversified resources stock. On Friday, Smith Barney repeated its Anglo American recommendation at buy, arguing that the "implied discounts on certain parts of the group appear to be excessive." The analysts argued that Anglo American will continue to attract short-term interest on rising platinum and gold prices "whilst offering a potentially interesting restructuring story."
Dresdner Kleinwort Wasserstein, which covers these plus other stocks not listed on the JSE, recently recommended staying overweight on the mining sector, "with the re-rating story now clearly underway." In light of further upgrades to commodity prices and earnings forecasts, analysts said their estimates remained on average 20% above consensus.
The price target for BHP Billiton was raised to 1100 pence a share from 1000 pence (on the London Stock Exchange, where the stock was trading around 835 pence a share on Monday); Anglo American was raised to 1850 from 1540 pence (1625 pence); Xstrata to 1750 pence from 1555 (1429 pence); Rio Tinto to 2750 pence from 2300 (2276 pence), and Lonmin (which also trades on the JSE) to 1320 pence from 1150 (1267 pence).
Gold zings amid hot resources
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