Mining stocks bounce and not a moment too soon

What’s the best performing large cap stock of the ASX this year? It’s Fortescue, the iron ore miner.

What’s the best performing large cap stock of the ASX this year? It’s not an infant formula exporter or a tech company: It’s Fortescue, the iron ore miner. With a bang not a whimper, mining stocks are roaring back and if you think the big miners are suddenly looking better you should check out the action in small caps.

And the sparkle has returned right across the sector with price increases in several metals — even coal is getting some good price news.

Of course as it was on the way down — when prices crashed over the past two years — so it is on the rebound, with iron ore as the bellwether for mining generally. Iron ore — the kernel of profitability for BHP and Rio, not to mention the federal government — has come racing out of the blocks almost touching $US70 in recent days after hitting what now looks like the bottom of $38 late last year.

Even if you are not a direct investor in mining shares — and the chances are that your super fund at the very least has stakes in BHP, Rio and Woodside — a rebounding iron price is good news for almost everyone.

The Midyear Economic and Fiscal Outlook statement released just before Christmas “assumed” an iron ore price of $US39 — it is now miles higher than this figure. Even if the price was to fall back to $US48 (close to current forecasts from Macquarie Bank and JP Morgan), it means the government would have about $7 billion more to go towards the May budget bottom line than is currently pencilled in the books.

What’s behind the recovery? In many ways the utter mystery of mining stocks in recent times has to turn eventually but a number of factors have usefully combined in the past few weeks

1. China has begun to stimulate demand in its property market and prices are rising in this steel-using sector.

2. The official China GDP rate for the first quarter of the year at 6.7 per cent is better than many expected.

3. International investors have been “shorting” the big miners — the upswing in prices will have forced so-called short covering, which boosts stock prices further, and this would explain big jumps in BHP’s share price.

But if you really want to see serious price action across the resources sector, it’s worth looking at the small cap end of the market.

As Eureka Report’s Tim Treadgold has noted, one of the early and reliable signs of renewed enthusiasm was a range of capital raising among minnows that were oversubscribed, something that would have been inconceivable just six month ago.

Importantly the action extends well beyond iron ore, notably into sectors such as potash, gold and lithium.

Just to give some examples: Pilbara Minerals, a lithium developer, easily raised $100m this month, while a spectacular — and you might say spectacularly speculative — case is Core Exploration, which has raised $2.2 million in a heavily oversubscribed share placement in recent days.

Putting it all together the recent burst of action means two key points for investors:

1. Large caps have jumped away from death’s door and live to fight another day. But for most serious investors the price levels of these stocks — BHP for example at $20.49 — remains so shrunken as to be barely relevant still.

2 Traders, speculators and entrepreneurs have been given the green light to return to the fray. The sight of oversubscribed mining placements and some new mining IPOs in the wings on the ASX is evidence of this new buoyancy.

Will it all hold? It has been such a headlong rush to recovery that a reversal is obviously a very high risk.

Earlier this week BHP Australia boss Mike Henry explicitly warned investors the iron ore price is not expected to remain at the lofty level of $US70 — nonetheless the chances of iron ore falling all the way back to pre-Christmas levels must be very slim and that means breathing room for a host of mining CEOs, not to mention Treasurer Scott Morrison on budget day, May 3.