why so cheap compared to rio it , page-36

2006 - time to switch into large caps Aireview number 90 (pages 15 and 16):

DID YOU MISS THE RESOURCES BOOM?

As the business media has reflected on 2005, only one subject has been a focal point: the return on
resources companies. (Poor results for retailers gets some airspace, but in the scheme of things, who gives a rats?).

The S&P/ASX 200 Resources Index rose 48.1% in the year. It is safe to say this figure has been largely mind-boggling. While those who predicted a top in the market at some stage last year are now in rehab, even the super-cyclists have been taken by surprise. This is clearly evident in constant and almost apologetic commodity price revaluations by all brokers all year long.

So as the new year encourages a fresh outlook, again we say: where to from here? The answer to this is most likely God only knows, but then even God wished he’d bought more BHP. I’m sure resources analysts would happily throw in the towel and say “your guess is as good as mine”, but unfortunately they’re paid to have an opinion.

Barclays Capital concedes there is no strong consensus on future metals prices. In fact, the spread between the highest and lowest analyst price forecasts has never been as large. Barclays suggests there’s a butterfly effect in place, as very low inventories mean an analyst’s incremental assumptions on supply and demand affect very large changes in price projection.

Even the most bullish forecaster has been too cautious on prices, says Barclays. Upward revisions to price estimates, and adjustment to a higher price environment, are still necessary.

This puts Barclays clearly in the onward and upward camp. To back their view, the analysts note that
adjusting for inflation, and looking at base metal prices in real terms, prices are not that high. In fact, they are still some 40% below the peak in the late 1980s.

The predictive graph suggests Barclays backs the concept of a quantum shift in average prices. It
also indicates the analysts believe volatile times are still ahead. What should a small investor do?

Intersuisse analysts subscribe to the super-cycle theory, qualified by the usual dice roll of demand
growth in China and India. Supply is easier to follow, and where the doomsayers fell down is in assuming supply would rise quickly to meet demand. Rising costs and increasing environmental issues, irrespective of previous underinvestment, have ensured supply growth has been slow.

Intersuisse notes that within its own universe of (157) Australian listed resources stocks, 2005 saw 57 stocks rise by more than 50% while only 9 fell by more than 50%. 34 stocks rose over 100% and 12 over 200%.

Despite these fortune-making results which may well frustrate a reflective small investor, Intersuisse
warns small caps are not the place to be in 2006. The analysts doubt many smaller explorers will actually reach profitable production. The analysts favour the safety of the biggies with their solid dividends. In other words, close your eyes, cross your fingers and plough into BHP (BHP) and Rio Tinto (RIO) at scary levels. Or just let your super fund bear the pain.