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| Around the Markets: Chinese miners defy global price drop |
| News Archive - Coal & Electric Power -Oct news | |
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(ChinaCoalResource, Oct 18, 2006) Chinese mining companies face falling global prices and rising costs, but Daniel Sacks, a South African fund manager, is backing them anyway. Profit at Zijin Mining Group, operator of China's largest gold mine, and Hunan Non-Ferrous Metals, owner of the world's biggest tungsten reserves, is likely to increase as they buy smaller rivals, lifting production, said Sacks. He helps oversee $46 billion, including Zijin shares, at Investec Asset Management in Johannesburg. Zijin, Hunan and China Shenhua Energy, the nation's biggest coal producer, reported record first-half profit as China's growing demand drove up prices. Even after the biggest three- week drop in commodities prices in more than 25 years last month, shares in all three are up for the year. China is the world's biggest consumer of copper, aluminum and zinc. "We like Chinese mining stocks because we believe their earnings will be much better than the market consensus even though metal prices may fall," Sacks said. "Consolidation is definitely a good story, and Chinese metals demand is growing fast." Zijin, which also produces copper, on Oct. 2 agreed to buy a stake in Ridge Mining to gain a foothold in South Africa's platinum industry, following acquisitions in countries including the Philippines and Mongolia. The shares have dropped 20 percent since reaching their 2006 high in April. They have doubled for the year - the best performance in Morgan Stanley Capital International's All Country Asia Pacific Materials index. Hunan stock, down 19 percent from the year's high in May, has almost doubled since its March listing, beating this year's 7.2 percent gain in the 118-member materials index. "China's growth in metal consumption will outpace supply," said Sean Zheng, a fund manager at Dingtian Asset Management in Beijing. "Rich people are demanding Audi cars, made with aluminum, and asking for copper pipes in offices and houses rather than plastic ones." The declines in metal prices have hit mining companies worldwide. Stock of BHP Billiton, the world's biggest, has dropped 15 percent since its high for the year on May 11. Newmont Mining, the largest gold miner, has dropped 25 percent in the same time. Hunan stock trades at an average of 16.5 times forecast earnings, Zijin is at 27.4 times, Shenhua at 13.3 and Aluminum Corporation of China, the largest producer of the metal in the country, has a ratio of 5.4. The Shanghai Stock Price index has an average of 23.4 times forecast earnings. Global metal inventories are at 30- year lows, and shortages for commodities like copper and nickel will last into 2007, capping the drop in metal prices, according to Merrill Lynch and Goldman Sachs JBWere. Profit at Shenhua, which has reserves second only to Peabody Energy of St. Louis, Missouri, surged 75 percent last year. Shenhua shares have climbed 56 percent this year, compared with a 0.02 percent drop at Peabody. Shenhua owns power plants, railways and ports as well as coal mines, and has lower transportation costs than overseas competitors. "Compared with global rivals, Chinese metals companies have many advantages - they are in the world's fastest-growing economy, where demand is booming," Zheng, of Dingtian Asset, said. "Mining costs and labor costs are much cheaper" in China, which accounts for 60 percent to 80 percent of global metals consumption growth, he said. The Chinese economy grew 11.3 percent in the second quarter, the fastest pace in more than a decade. China more than tripled its copper use in the past decade and is expected to consume as much as 20 percent more aluminum a year until 2010, the chairman of Aluminum Corporation, Xiao Yaqing, said in August. "A moderate correction in copper prices won't affect our earnings," Wang Chiwei, deputy general manager of Jiangxi Copper, China's biggest copper producer, said in an interview on Sept. 26. "Compared with 2002, copper has risen sixfold." Still, mining costs are rising globally as energy and transportation expenses increase and on lower ore grades in newly developed mines. Worldwide capital costs at mines surged at least 40 percent in 2005, compared with 25 percent in 2004, according to David Coombs, manager of cost studies at Britain's metals researcher Brook Hunt. Overseas producers also face rising labor costs. Workers at copper mines from Chile to Canada are demanding higher salaries at the same time as concern is mounting that U.S. economic growth is slowing. "Sentiment on the mining sector has been affected by concerns over the imminent slowdown in the U.S.," said Alfred Wong, who helps manage $12 billion of funds with UOB Asset Management, including Aluminum Corporation and Shenhua, in Singapore. Commodity producers that are expanding capacity are worth buying, said Zhang Feng, an analyst at JPMorgan Chase in Hong Kong who recommends Aluminum Corporation, which is also known as Chalco, Maanshan Iron & Steel and Shenhua. Chalco is taking over smaller rivals. Maanshan, China's second-biggest Hong Kong-based steelmaker, will raise capacity by 50 percent to 15 million tons by mid-2007. "Demand is still expected to be strong, and supply of commodities is still very tight," Wong, at UOB said. source:ChinaCoalResource |
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