11 April 2011,


Past trends

The GFC pulled the handbrake on investor confidence in 2008 and 2009 with IPOs slowing to a trickle. Non-essential equity raisings were canned, with secondary markets and low-doc raisings being favoured for those brave (or desperate) companies, with a strong trend toward balance sheet repair or maintenance as a principal driver for the raising (as opposed to growth motives).

Recovery was slow, but 2010 saw a steady rise from 2009 lows, picking up pace in November and December. Small cap stocks (<$100 million) dominated this space with approximately three-quarters of these companies representing the resources sector. Quantity of debutantes aside; the real indicator of recovery in 2010 was the stronger performances of market entrants, with many showing returns well above GFC years, share prices closing above issue price on the first day of trade and over 75 per cent of IPOs closing fully (or over) subscribed. Star performers Doray Minerals and Hunnu Coal showed gains from their listing price of 593 per cent and 568 per cent respectively.

2011 begins at apace

Following this trend, 2011 opened powerfully with upwards of 25 companies already hitting ASX’s boards by early March. Resource companies represented a healthy 75 per cent plus of this number. The consensus view is clear; resource companies are expected to continue to dominate the boards throughout 2011.

The speed bump

Floods, cyclones and fires at home threw up the first wave of challenges for our explorers and producers. With more than three-quarters of Queensland projects off line in early 2011, the volatility in commodity prices was hardly surprising as concerns over supply constraints took hold.
The mass devastation of Japan’s earthquake and tsunami created the second major speed bump which (alongside over major international events) caused wild intra-day swings on Wall Street.

A look at some statistics about our major trading partner sheds light on the significance of these events: Japan currently represents >5 per cent of world GDP with positive growth tipped (pre-disaster) for 2011/12.
Japan’s purchases represent a significant proportion of Australia’s export commodities, including iron ore (21 per cent), metallurgical coal (31 per cent), thermal coal (50 per cent), copper (16 per cent), aluminium (37 per cent) and uranium and LNG (percentages confidential).

The impact of the Japanese disaster on our resources sector is likely to be two-fold. In the short term, expect a spike in demand for commodities such as thermal coal, oil and LNG as alternative fuels to nuclear to make up for lost capacity. With most steel factories and major ports in Japan still operating, demand for iron ore and coking coal is expected to remain steady. In the mid to longer term, the inevitable rebuilding of parts of Japan is expected to show increased demand for commodities forming the basis of construction materials.

However, we expect that demand drivers are likely to spread further than Japan. Our Trade Minister has speculated that the value of Australia’s uranium reserves is likely to weaken, with a converse strengthening in the value of our LNG reserves.

What does this mean for 2011?

Market fundamentals and the last 12 month trend show a very positive outlook for resource companies. However, the current uncertainty prevails with major markets still showing wild volatility. But if there is one thing you cannot argue with, it is demand and supply.

Our sentiments are that (unless other major world events unfold), the confidence ripples of the Japanese and Libyan stories will represent a mere speed bump on positive trends established throughout 2010.

Source acknowledgements: Our thanks go to James Macaulay and Cameron Lofstedt of RBS Morgans (Brisbane branch) for supplying much of the data and source material for this article. Statistics and information on the Japanese outlook was sourced from: Business Spectator: ‘Everything you need to know about nuclear’, March 19, 2011 (www.BusinessSpectator.com.au).






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