coal & uranium:
It is not easy trying to focus on a trading theme for 2005 when there are so many choices.
One popular view is by calling the top on the housing market and shorting some of the well-known house builders. On the other hand when you read about the supply shortages and the undemanding price to earnings ratios (p/e) such as Bellway or McCarthy & Stone it becomes about as clear as mud as to how to play this sector. Other fashionable themes include trading stocks that are affected by the dollar, buying oil companies when Brent crude hits $40-43 and shorting general retailers after a miserable Christmas. However there are two themes in the form of energy, which I particularly like, and they are coal and uranium.
Last year we witnessed China deliver 9% growth in its Gross Domestic Product and although we do not expect to see this sort of growth to be exceeded in 2005 we are still looking for the momentum to carry through into this year. There is no doubt that the likes of BHP Billiton , Rio Tinto and Anglo American have all benefited from China's growth story and we believe these miners will continue to profit, albeit at a slower pace, throughout 2005. After hearing on the news that factories in China are suffering power shortages it comes as no surprise that coal is very much in demand. In fact UBS has upped its price target on coking coal by $20 to $110 per tonne for 2005.
To an extent some of the miners are hedging their bets by diversifying into uranium. This resource is used to power nuclear reactors and the price of uranium is set to rise by 25% this year because of rising demand and dwindling stockpiles. China and India are preparing to build 27/17 nuclear reactors respectively by 2020. Even the environmental activist Greenpeace prefers nuclear energy to conventional power sources such as carbon emitting coal.
So having briefly laid my case for buying into these resources where do we go from here? One exciting story comes from Xstrata , a precious, base metals and coal producer. The shares offer good value in the mining sector with a forward 2006 p/e of just 8 against a sector average of 11.2. Last year it successfully integrated Australian copper/coal producer MIM holdings and is now locked in a hostile bid for WMC. The battle for control over WMC is putting a lid on Xstrata's share price around the 965p level and it would not come as a shock if it had to sweeten its offer by an extra £400 million.
The appeal about Xstrata acquiring WMC is that the latter is reckoned to own and control about 20% of the world's uranium resources. Chart-wise Xstrata seems to be stuck in a channel between 870p and 950p and should Xstrata cough up to meet WMC's demands I would not be surprised to see it test the support of 865/870p again. The downside risk now relates as to whether it ultimately snaps up WMC and how much extra it may or may not have to pay for it. However with the upside potentially very rewarding, I would recommend building a long position in the region of 870p-890p
BHP Billiton , is also worth a look. It is one of the world's largest producers of export thermal coal servicing Europe, Asia and the USA. At 630p it has a forward 2006 p/e of 11.9, slightly at a premium to the sector average. Such a mark-up could be justified based on the company's ability to concentrate its assets where it can find better returns such as coking coal. Looking at the charts it remains in a solid uptrend and bulls of this stock might want to consider long positions in the region of 610-620p.
If we look at the small cap stocks that offer investors an exposure to coal and uranium then look no further than Anglo Pacific , tipped by Citywire on 29 November last year. It owns the rights to a number of coal mining interests on which it receives royalties from the majors such as BHP Billiton and Anglo American. On top of this it owns stakes in a number of companies such as Cambrian Mining , which in turn owns significant stakes in the popular coal developer Asia Energy and Western Canadian Coal, another Citywire tip, from 15 November. Interestingly it also owns a little more than 8% of Toronto-listed miner Laramide Resources, which in turn owns a Uranium project in North West Queensland, Australia. Although the stock appears relatively expensive on a current p/e of 29 it has delivered earnings per share (eps) growth in the last two years of approximately 30%. Given the sentiment offered to the coal & uranium sector, the stake building by shrewd fund managers and the steady uptrend it is on I would suggest jumping on board with a long in the region of 105-110p.
There are of course a number of other smaller-capped players such as Western Canadian, Asia Energy, Cambrian Mining and to a lesser extent Rab Capital , which offer an exposure to coal and/or uranium markets. However with the recent volatility these stocks have experienced and the margin required by the CFD providers, the timing to go long is very important. Watch this space. |
