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GLOBAL MINING PORTFOLIO FLOWS

Mining stocks: world's 100 most demanded

How the mix has changed dramatically for $ 1.3 trillion worth of listed miners; China and copper are in, gold is neutral, while nothing sexy yet for platinum, potash or diamonds.

Author: Barry Sergeant
Posted: Thursday , 23 Jul 2009

JOHANNESBURG -

Seen as a global group, listed mining stocks, with an aggregate value of $1.255 trillion, made 10-month price highs Thursday. Within the group, however, pricing patterns look very different to those seen 10 months ago. At this point in time, of the world's 100 most in-demand listed mining stocks, with a minimum market value each of $20m, 50 are located in the Asian region.

Broad Chinese stock markets are currently making fresh 12-month highs, as demonstrated by the levels of indices such as the CSI 300 and the Shanghai Composite; the India Nifty also ranks as one of the world's better performing stock indices.

Of the world's 100 most sought after listed mining stocks, nearly 50 hail from China; if Indian iron ore digger Sesa Goa and Steel Authority India are included, along with copper-gold miner Philex, from the Philippines, plus Canada-listed Mundoro, which mines gold in China, the number of rises to 50 in the Asian region.

This ongoing development, where Chinese miners have seemingly disengaged from the global group, or essentially split the global mining sector into two tiers, continues to gain momentum. Chinese miners, often under direct or indirect state control, rank as suppliers of first choice to the country's booming infrastructure spend, enhanced as it has been by huge additional allocations of capital to partially counter the non-Chinese global slump that set in during September 2008. Chinese miners are also generally well capitalised, directly or indirectly, and are seeking expansion across the globe.

But it is not only the dramatically changed geographic dominance that characterises patterns in global mining investment portfolio flows, but also the change in preferences for metals and commodities. The global listed mining group previously made multi month highs on 3 June, before sinking to a trough on 23 June, and then rising to fresh multi month highs today, as indicated. Patterns of portfolio flows indicate that since 3 June, investors have been net sellers of listed non-Asian coal stocks, and also net sellers of miners digging for potash, platinum and diamonds.

Portfolio flows over the period have been neutral for listed Tier I global gold stocks, uranium producers, overall iron ore stocks, and aluminium stocks. There has been heavy net buying of listed stocks in zinc, silver, copper, tin, and of Tier I Asian coal miners.

Once again, however, the geographic two tier influence is apparent. The outperformance of zinc stocks is heavily due to the influence of a number of Chinese stocks running up close to, or making, 12-month highs: NFC, Hunan, Huludao Zinc, Sichuan Hongda, Shenzhen Zhongjin and Yunnan Chihong; India's Hindustan Zinc, one of the world's top five zinc producers, is also running close to highs. Pure zinc plays are difficult to find, but Western stocks in the field are relatively underperforming, as seen in the cases of Australia's CBH Resources and Jabiru Metals, and Canada's cash-flush, potential takeover target, Hudbay Minerals.

The outperformance of primary silver and also tin miners is influenced by the relatively small size of the two subsectors; London-listed Mexican miner Fresnillo comprises $7.4bn of the $21.4bn investible market value of primary silver miners; its stock price has soared by 20% in the past two weeks, after sustaining bouts of heavy profit taking from 3 June. Yunnan Tin is by far the biggest listed stock of its kind, and is priced close to 12-month highs, while the No 2 player, Timah TBK PT, languishes somewhat.

Primary copper miners rank as one of global mining's bigger investible market values, with at least USD 100bn available. Copper was nudging $ 2.50/lb on Thursday, its best levels in nearly a year, when it peaked around $4.10/lb, before crashing to $1.28/lb in December 2008. However, the recent positive net portfolio flows into copper stocks have been heavily focused on relatively few names, in the form of London-listed Antofagasta, China's Yunnan Copper, Jiangxi Copper, and Tongling, and copper-gold digger Philex.

Some of the biggest copper stocks are also rising, as seen with Southern Copper, KGHM Polska Miedź and Sterlite, but the world's biggest publicly traded copper stock, and also a Tier I global gold miner, Freeport-McMoRan, continues to lag the pace. Seen as one of the larger investible mining subsectors, copper miners now rank first on a 12-month price return basis.

Perhaps nothing better illustrates the divide between Chinese and Western mining stocks that in the dramatically different price performance of coal stocks. A good number of Chinese coal miners are currently at, or making, fresh 12-month highs, led by the likes of SDIC Xinji, Anhui Hengyuan, Shanghai Datun, Shanxi Lu'an, China Coal, and Kailuan; the country's biggest listed coal digger, Shenhua, which also produces power, currently carries a market value of $91.1bn, ranking it the fourth most valuable mining stock globally, after BHP Billiton and not too far behind Vale, and Rio Tinto.

The stock price performance of big US coal names considerably lags that of Chinese counterparts, as seen in the cases of Peabody Energy, Consol Energy, Arch Coal, and Massey Energy. At the same time, it can be noted that a number of Australian names are performing closer to the Chinese than the US standard, led by New Hope; Coal & Allied is also in pretty good demand.

It is also especially noteworthy that a good number of Chinese aluminium stocks rank up with the best in terms of stock price performance, as seen with the likes of Chalco, Yunnan Aluminium, and Shandong Nanshang. This again contrasts heavily with competitors outside the country; Alcoa is trading around 70% below its 12-month highs, with smaller names such as Century Aluminium, up to 90% off highs; even Norsk Hydro, with its lower cost energy benefits, is 58% off highs.

Looking at the broader list of the 100 most demanded mining stocks at this time, there have been some recent excellent individual price performances, where can be mentioned Australia-listed Mantra Resources (with uranium projects in southern Africa), London-listed Patagonia Gold, Australia-listed Sandfire Resources (on excellent gold drilling results), Centrex Metals (iron ore developer), Magma Metals (precious and base metal interests in Australia and Canada), Jinduicheng (molybdenum), Moto Goldmines (on takeover action, where Red Back has been counterbid by a joint attempt from AngloGold Ashanti and Randgold Resources), Australia's Independence Group (gold and nickel), Firestone Energy (coal interests in South Africa), Boliden (mainly zinc and copper), and Extract Resources (on further expanding its significant uranium resource in Namibia).

The "usual suspects" that may or may not be perceived as potential or actual takeover targets for bigger gold groups are up there with the best: Medusa, US Gold Corp., Kingsgate, Lake Shore Gold, Seabridge, San Gold, Intrepid Mines, Iamgold, Romarco, Alamos, West Timmins, Osisko, Queenston Mining, Semafo, Allied Nevada, Eldorado, and Northgate.