Miners balance bourse as banks take a breather

TO the extent that yesterday’s strength in miners was offset by banks, heavyweight moves looked like position squaring.

TO the extent that yesterday’s strength in miners was offset by weakness in banks, relatively sharp moves in the sector heavyweights looked like position squaring, or “mean reversion” before the outcome of the Federal Reserve’s two-day policy meeting, and the bank reporting season.

BHP Billiton, Rio Tinto, Fortescue Metals and Newcrest Mining gained 1.1-3 per cent despite further weakness in commodity prices.

At the same time, Commonwealth Bank of Australia, ANZ, Westpac and National Australia Bank — which reports its full-year results this morning — fell 0.6-2.1 per cent.

The benchmark S&P/ASX 200 slipped 0.1 per cent to 5447.7 after hitting a five-week high of 5481.6.

Analysts have had some indication that banks will meet their overall profit expectations after ANZ inadvertently released growth numbers last week than imply a cash profit for the year about 1-2 per cent above the market consensus.

But after pushing the bank sector up 8 per cent in the past two weeks, investors had some last-minute nerves yesterday.

Compositional aspects of the bank results will be important, as will any guidance on capital requirements and whether or not that will affect the dividend outlook.

Still, there were a few sparks of optimism on the local mining sector yesterday.

One analyst said UK institutional investors attended last week’s tour of Fortescue Metals’ Pilbara iron ore operations because they thought the sector was bombed out enough to start looking for bargains.

Bell Potter executive director Charlie Aitken saw an increasing likelihood of Glencore having another shot at Rio Tinto, saying, “the day will come when Glencore bids for Rio and it might just be hostile”.

“When that day comes, investors will positively reassess the value of remaining large-scale, low-cost, long-life Western Australian production assets,” he said.

Some analysts are adamant that it would make no sense for Rio Tinto shareholders to accept what would probably be an all-scrip reverse-takeover bid from the much-smaller Glencore.

Glencore would no doubt be keen to diversify into iron ore, but synergies would be limited to coalmining, and some Rio Tinto shareholders might baulk at Glencore’s lead and zinc exposure.

But at least one analyst at a major firm agreed Mr Aitken could be on the money, particularly if Glencore offered something like a 40 per cent premium to Rio Tinto shareholders. After all, Glencore enjoys a handy PE premium to Rio Tinto.

Under UK takeover law, the Swiss miner has to cool its jets for six months before any new bid.

Fortescue digs deep

THE feedback from Fortescue’s site visit last week has been mostly positive, but with spot iron ore slipping back below $US80 a ton, and iron ore heavyweights Rio Tinto and BHP Billiton ramping up production, “The New Force in Iron Ore” certainly needs to dig up as much as it can.

Credit Suisse analyst Paul McTaggart says the Fortescue site visit highlighted a “no-capex” pathway to a potential 180 million tonne per annum production rate, and a “bankable” 171 mtpa in fiscal year 2017 versus Fortescue’s annualised production rate of 166 mtpa in the September quarter.

Deutsche Bank analyst Paul Young raised his Fortescue target price 3 per cent to $3.95 a share after raising his earnings projections. That’s based on the fact that the world’s fourth-biggest iron ore miner is continuing to increase its iron ore production and lower its production cost per tonne.

But Fortescue’s profit margin has been whittled away by a 40 per cent fall in the price of iron ore over the past 12 months.

At current prices below $US80 a tonne, Fortescue’s net present value would fall about 50 per cent to $1.85 a share, and cash would drop below $US500 million unless capital expenditure was deferred, Mr Young cautions.