exchange rate to put downward pressure on sp, page-26

Champ said:

"Based on this info we may as well just say that every single Aust based company is going to trend down due to the AUD strengthening. Obviously that is not going to happen."

No, a strengthening AUD will adversely affect only those companies that predominantly have their earnings & assets denominated in USD. For example, CSL gets 80% of its earnings from the US, so it's share price will suffer as it's income, when converted to AUD and distributed to shareholders, will reduce. A contrasting example is Harvey Norman; in this case the higher AUD means they buy cheaper TVs and can flog them to the customers for much lower prices, and earning more profits as well. So a higher AUD will affect different companies in different ways. Exporters & companies with assets in USD (that's us, with EXT) will suffer.

What's different this time is the attitude of the Reserve Bank. Previously the Reserve has acted to suppress the currency. This time, the head of the Reserve Bank has stated that the currency will be left to rise to find its natural level even if above parity (ie A$1=US$1). So the Reserve will continue to hike interest rates, and large sums of money will move into AUD because they can earn interest on their cash here, as the US, Europe and Japan all have effectively zero interest rates. And so our dollar will go up.

Champ said:

"At the end of the day this type of discussion is more suited to a currency debate thread specifically for that as this is not relevant to EXT specifically."

No Champ I disagree - this is VERY relevant to EXT. Our only asset is in USD so any prolonged currency rise will hurt our share price. Most analysts, and I include myself here, assumed an exchange rate of $0.85 even when the currency was lower, as we knew the AUD would rise a bit. What analysts have under-estimated, and it is a bit of a surprise, is the recent strength of the Australian economy and the consequent rise in the AUD to perhaps/probably above parity.

When the numbers assessing EXT are re-run with an exchange rate 20% higher, the value of EXT shares drops by about the same amount. Take a look at the broker reports and the effect of a change in AUD:USD:

WH Ireland Research Report 18 Aug 09: Assumed exchange rate 0.75. A 5% change in USD:AUD leads to a 6.5% change in NPV (net present value).

RBC Research report 11 Aug 09: Assumed exchange rate 0.65 to 0.75. A 5% change in USD:AUD leads to a 5% change in NPV. Report includes this statement: "Extract’s financial performance will be highly sensitive to changes in the Australian Dollar : U.S. Dollar exchange rate" (p 11)

These research reports are available on the EXT website.

To sum up: The rise in the AUD to $0.90 was considered an upper limit due to previous action by the Reserve Bank. Now the Reserve Bank has stated it would not interfere even if the exchange rate went higher than parity. This has not been taken into account when valuing stocks that predominantly rely on the USD for their valuation. EXT is clearly highly vulnerable to a higher USD and this expectation has yet to sink in to investors (especially, it would appear, some of those on this thread).

I expect the EXT share price, in the absence of any news, to weaken in response to the AUD rise. This may be especially so on or around Melbourne Cup Day when an interest rate rise is expected - the currency could well jump on that day.