mining still on the up...

Source: www.theaustralian.news.com.au

Mining still on the up
Robin Bromby, Resources
October 02, 2006

MINING shares, far from peaking, are to soar further according to the latest reports from leading analysts.
The resources team at Deutsche Bank predicts that Rio Tinto's price has still $34 to go before it reaches target.

Deutsche's Peter Rose and colleagues, with Rio last trading at $70.10, made this big call of a $104 target in the belief that the worst of the commodities price correction was over and recovery was just around the corner.

This was a view shared by Merrill Lynch's London resources guru Evy Hambro who said on Friday that mining companies were "staggeringly cheap", a sentiment echoed over the weekend by Sydney-based Fat Prophets which believed the large diversified majors such as Rio and BHP Billiton were "incredibly cheap".

Fat Prophets analyst Gavin Wendt said no sector other than resources could offer share prices only 10 times earnings, solid yields and rivers of cash flowing in. "If you sell BHP or Rio and take your money, where do your put it? In banks -- no; in retail -- no; in Telstra -- no."

Citigroup said its key resources pick was BHP while ABN Amro, reporting on that company, stated: "Enough selling, time to buy." This confluence of bullishness comes just weeks after several analysts, most notably Morgan Stanley's Stephen Roach, spooked the markets with calls that the metals boom was about to fall over, triggered by economic slowdown and a housing sector crisis in the US.

Yet the stocks at the London Metal Exchange indicate demand for metals is not far from its peak. LME nickel stocks were 5500 tonnes last week (less than two days' global use) against a 52-week high of a still modest 37,218 tonnes; zinc stocks were at 142,200 tonnes against a 52-week high of 533,325 tonnes and lead at 62,500 tonnes against a high of 117,900 tonnes.

And the two-year futures on the LME tell the story. Nickel for delivery in three months was fetching $US28,775/tonne on Friday, but the 27-month contract price ended at a very bullish $US20,700; copper was selling on Friday at $US7535/tonne, but buyers expect to be paying a still high $US6040 in 27 months time; while zinc is also expected to make only a modest retreat from $US3340/tonne to $2468.

All those price trends are down -- but the lower ones still represent bountiful profits for debt-free majors.

ABN Amro's team said the market's confusion was understandable, with some investors saying base metals were about to fall out of bed, others not understanding what the doom and gloom was all about.

"It could be fair to say that we are contributing to the confusion with our view of equity prices heading north and base metal prices heading south."

Even if metal prices fell, the big miners were riding on a tide of handsome commodity incomes. Their share prices would rise once "ongoing growth and solid returns drown out the near-term noise". Deutsche bases its $104 share price target for Rio on global growth moderating but not imploding, upgraded iron ore price forecasts and Rio earning big money on aluminium, copper and molybdenum.

Less favoured was BHP, although the target is $32.60 against Friday's $25.63 close. Deutsche sees commodities staying strong after a mid-cycle dip resulting in BHP shares performing well over the next year.

Zinifex also gets the nod: its target has been increased to $14.59 a share based on higher zinc prices. It closed at $11.75.