Should we take the money or buy yet more resources? (NWH, BSL, FMG, S32, WHC, SFR)

James Gerrish

Market Matters

We have recently moved fairly aggressively long the resources stocks with a 24% direct holding not including gold, hence the obvious question after moves like yesterday, should we buy more or take profit? 

Yesterday I had a chat with my favourite resource analyst Peter O’Connor – a good time to get his views. The video covers calls in BHP, RIO, FMG, WSA, IGO, OZL, SFR, S32, WHC, AWC & Golds.

In the note below we’ve taken another look at the resources sector following the interview (above) I did with Shaw & Partners highly regarded Resources Analyst Peter O’Connor- as always a highly recommended view.

Ideally readers will have listened to my interview above with “Rocky” before reading this section of todays report. Happily like ourselves he remains bullish resources. The chart below illustrates perfectly that base metals are poised to rally strongly assuming we see a reasonable resolution from the US – China trade talks – the 20% correction over the last 18-months clearly shows the concerns that the trade disagreements between Presidents Trump and Xi Jinping have caused investors with regard to a potential global economic slowdown.

Market Matters believes that the US and China will nut out a deal of sorts leading to at least a 8-10% pop higher in base metals, its simply in both of their interests.

MM remains bullish the industrial metals.

Bloomberg Base Metals Index Chart

Copper is often tagged with the catchy name of “Doctor Copper” because it is a great representation of the health of the global economy i.e. when things are booming we use more copper driving up the price. However, while the world has been concerned around a looming global recession , with much of the blame being laid at the door of the escalating trade war, this primary industrial metal has fallen over 25%. We believe the risk / reward has now clearly swung in favour of the upside for copper hence our recent purchase of OZ Minerals (OZL).

MM is bullish copper initially targeting the $US300/lb area.

Copper ($UUS/lb) Chart

So as we remain bullish base metals the question is we do we increase our market exposure, sit back and enjoy the ride or tweak our existing positions for better leverage to our view.

Firstly, let's consider a couple of our existing holdings with one eye on potential sell prospects to “fund” allocations elsewhere which might have greater upside potential. Our portfolios have two obvious candidates at current levels that we’ve discussed in recent reports for our subscribers:

1 – BlueScope Steel (BSL) $13.54 - steel maker BSL has rallied towards fresh 6-month highs over recent weeks but while our target is still ~5% higher this is not a stock that’s likely to pop higher if / when base metals break to the upside.

BSL is a candidate to switch into a more leveraged industrial metals play.

BlueScope Steel (BSL) Chart

2 – Fortescue Metals (FMG) $9.38 - This huge iron ore success story has followed our technical script perfectly, Twiggy Forrest’s company is only 1% below its all-time high even after paying some attractive dividends of late and the bulk commodity languishing almost 25% below the years high. This has become a phenomenal cash cow that could easily go on to challenge its $13 pre-GFC all-time high. Hence although FMG has now basically achieved our target we are likely to give this position a little room to really perform.

MM is bullish FMG while it can hold above $9.

Fortescue Metals (FMG) Chart

Iron Ore Chart

Three “cheap” targets

MM has already almost “filled our boots” with resources but if the sector is set to really pop higher a little more, or greater leverage, would never hurt. This morning we have taken a brief look at 3 stocks that are now interesting according to Rocky and potentially in the accumulation areas for Market Matters.

1. South32 Ltd (S32) $2.61

MM has been bearish diversified miner S32 for most of the year but now the miner has corrected over 40% the picture has not surprisingly improved, but like most of the sector its relatively cheap and although many regard its 5.2% fully franked yield as a potential trap we don’t believe that’s the case just yet.

MM is bullish S32 from current levels with an initial target 15-20% higher.

South32 (S32) Chart

2. Whitehaven Coal (WHC) $3.32

WHC remains in a clear downtrend but it’s clearly offering far more value than a year ago. We are not convinced it is yet time to jump on board but the current rhythm of buying new lows is working extremely well, another break under $3 and MM will be very interested.

MM has WHC on “close watch” at this stage.

Whitehaven Coal (WHC) Chart

3. Sandfire Resources (SFR) $5.97

Major copper and gold producer SFR has been an out of favour resource stock in recent times but by definition it’s the one who can probably pop the hardest if / when copper rallies back towards $US300/lb i.e. it feels under owned.

MM is watching SFR for a potential break up but there’s no trigger in place just yet.

Sandfire Resources (SFR) Chart

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James Gerrish
Portfolio Manager
Market Matters

James is Portfolio Manager & Primary Author at Market Matters, a daily investment report with over 2500 subscribers that offers real market insight. He is also Senior Portfolio Manager within Shaw and Partners heading up a team that manages...

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