Has the Hammer come down too hard on the Australian Miners?

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Australia Mining

Has the Hammer come down too hard on the Australian Miners?

Australian Resource stocks have been hammered recently, with share prices falling and driving the broader ASX (Australian Stock Exchange) to 2-month lows. With fear of a global economic slowdown, are Australia’s leading Mining stocks likely to fall any further?

Two sectors drive the Australian stock market: Banking and Mining. While they may not be the largest employing sectors, they produce a large proportion (through royalties) for state governments, and when these sectors decline, the average investor feels the pinch.
Statements from the World Bank, released last week, suggest that global economic growth will slow more than previously expected in 2014. Global growth forecasts have been cut from 3.2% to 2.8% following a ‘sluggish’ start to the year.

Expectations are that the US will continue to slowly improve while the Eurozone remains in a slow recovery. The Developing countries are also feeling the pinch, with sub-par performance expected, with China GDP expectations being lowered slightly to 7.5% for 2014.

What does this mean for Australian miners?

(as at 18th June 2014)

  • BHP has declined approximately 8.3% over the last few weeks, and is trading at lows not breached since October last year.
  • RIO is trading at a 10-month low, down more than 18% since the peak in February.
  • Newcrest Mining (NCM) has traded flat since March, but is also down more than 18% since March, holding medium-term highs.
  • Fortescue Metals Group (FMG) has tanked, plummeting 36% since the peak in February and is trading at a 10-month low.
  • Iluka Resources (ILU) is trading at long-term lows, holding prices last traded at in December 2013 after falling 18% since early April

The haemorrhaging in stock prices for the leading Australian Miners has been influenced by numerous factors. More significant includes: economic weakness in China; an 18-month low price in Iron-Ore; cyclical slowing in demand for raw materials out of China; Australian dollar up 7.8% since late January.

Fall in stock price

So the million dollar question is whether or not leading Australian mining companies will continue to fall in stock price?

Current levels are absolutely critical. Many investors will perceive prices for all the aforementioned companies to be at ‘attractive’ levels, but we are yet to see signs of buyer accumulation entering the market. Investors appear to be quite concerned over the comments made by the World Bank and by the turmoil in Iraq, Syria and the Ukraine. All of which is causing hesitation in buying fundamentally strong stocks at good prices (in relation to recent long-term highs).

True test of faith

The coming week will be the true test of faith:

  • BHP needs to hold above $35, and from a technical perspective, a reversal to see the stock trading back above $35.70 could trigger a recovery rally.
  • NCM is following the price of Gold, and investors are not viewing the precious metal as a ‘safe’ investment at the moment.
  • FMG is suffering from the declining Iron Ore price. It is a high cost producer, and as Iron Ore prices decline, it’s profitability is eaten up. While the company may have longer-term contracts in place at higher prices, if Iron Ore cannot increase in value, the stock price won’t start to recover.
  • LEI is also in a holding pattern. Buying above $19 is still acceptable, but LEI could take awhile before a rise in price occurs. A break below $19, and LEI could easily slip another $2.

RIO is suffering the same fate as FMG and is yet to find any buyer accumulation. It could be a few weeks our view changes.

Investment Strategies

With all investment strategies, we establish where we will exit a position if it moves against us before we enter the position. We call this an Exit Stop, and it helps establish a calculated loss value. For our entry approach, we analyse technical price movements and prefer to identify buyer accumulation. If the technical entry aligns with what we analyse to be a fundamentally strong stock, we then have an alert for entry.

Australian Mining stocks

Australian Mining stocks have certainly been beaten down in recent months, and may actually be at reasonable accumulation prices. But we are on alert for signals of returning buyers before we jump the gun and pick these stocks up. There are a number of factors that need to fall into place before we are confident in this sector, so this is not a review to “Buy” miners right at this point in time.

In the meantime, keep an eye on our leading Australian mining companies. This certainly looks like an attractive price range.

* Customer Caution Notice: The past performance of this product is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect its future performance. The return mentioned above does include fee’s or charges, which may vary in any trading scenario. Assessing the suitability of this product should not be based solely on this information.

Since 1998, Matthew has been involved in the Financial Services industry providing stock, option and CFD advisory services, trading advice, funds management and education services. Matt is an Authorised Representative of Halifax Investment Services, providing analysis and recommendations for trading Covered Calls in the US markets and using Exchange Traded Funds (ETFs) ...
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