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Mining Gains from Down Under
03/12/2004 12:00 am EST
"A correction in mining and commodities is looming," say Elliott Gue and Yiannis Mostrous in Personal Finance. "Don’t be scared; be ready to buy. This bull market should last beyond 2010." Here are two Australian-based, NYSE-listed ways to play this long-term trend.
"Last year the most leveraged commodity plays performed best; that’s fairly typical of the first stages of a run in commodity stocks. This year the diversified miners—those with exposure to a number of different commodity markets—should play catch-up as institutional money rotates out of the most leveraged names. Two stocks that fit the bill are Rio Tinto (RTP NYSE) and BHP Billiton (BBL NYSE), both based in Australia, a country strategically located near the world’s hungriest consumer of basic commodities, China.
"Rio Tinto produces base and precious metals, energy products, and various industrial minerals. The company’s two largest segments are iron ore and copper, accounting for about 40% of its overall revenue mix. These two metals were in particularly high demand by China last year and saw some of the most dramatic increases in pricing. In response, the company is already boosting production capacity in iron ore to keep up with demand. Look for Rio Tinto to also continue beefing up its aluminum and coal operations this year. China depends on coal for much of its power needs and demand is rising quickly as the economy grows—coal will eventually need to be imported in bulk to keep up. Aluminum is used in container manufacturing, buildings, and industrial products—China’s imports surged last year. Even better, Rio Tinto’s recent earnings release was encouraging. The company saw a dramatic improvement in profitability between the second and first half of 2003 despite a very strong Australian dollar. In a sign of confidence the company hiked its dividend payout and committed more money to developing production capacity. Buy Rio Tinto under 120.
"BHP Billiton is the world’s largest diversified mining company. Like Rio Tinto, the company has its hands in just about every commodity market you can imagine. But, operations have a slightly different focus—Billiton’s largest two segments based on turnover are petroleum and aluminum. The company saw production from some of its more mature petroleum fields decline in 2003 but it’s increased spending on new exploration. Stubbornly high prices for both oil and natural gas will continue to be a boon for BHP. Aluminum was a big winner last year. Prices helped power an impressive near 16% jump in profits for the segment. In fact, overall price increases across the company’s metals operations added $1 billion to BHP’s earnings before interest and taxation. BHP remains a buy below 22."
The key risk-on and off drivers today are the same – U.S. politics, global growth, other centr...