Big miners regaining favour

Tony Featherstone is a Morningstar contributor and a former managing editor of BRW and Shares magazines. This article was originally published by Investor Weekly, a Sterling publication.

What a difference a few weeks makes. In September, newspaper headlines screamed about the meltdown in iron ore prices, and resource stocks tumbled. Commentators called an “end” to the mining investment boom amid fears that China’s economy was heading for a hard landing.

After tanking to US$88 a tonne last month, the iron ore price has rebounded to US$120 a tonne. Fortescue Metals Group (FMG) this week said it expects the iron ore price to stablise at current prices; Macquarie Equities Research sees a floor of US$115 over the next few years.

The big mining stocks have followed the iron ore price higher. Australia’s third-largest iron ore miner, Fortescue, has stunningly rallied from below $3 in September to $4.07. Macquarie has an outperform recommendation on it.

Rio Tinto (RIO) has jumped from a 52-week share price low of $48.37 to $56.05, and BHP Billiton (BHP) has rallied from an annual low of $30.09 to $33.45. Their prices are still well down on peak levels over the past 12 months, but sentiment has improved markedly from a few weeks ago.

Macquarie has outperform recommendations on Rio and BHP. Its 12-month share price targets of $76 and $39 respectively for Rio and BHP suggest considerable upside and a catalyst for a sharemarket rally in 2013 given the high weighting of these stocks in the S&P/ASX 200 index.

Several small and mid-size resource stocks are also starting to rally, after heavy falls this year.

Solid quarterly production reports from the big miners have also buoyed investors, and reports last week of better-than-expected Chinese export data led to calls that its economic slowdown may have bottomed.

A resumption of stronger Chinese growth would support higher commodity prices and potentially higher share prices of leading ASX-listed resource stocks.

Mining services stocks with heavy iron ore exposure, such as NRW Holdings (NWH), also rallied this week after sharp falls in recent months. Tumbling iron ore and coal prices raised fears that more mining projects would be cancelled or deferred, in turn leading to less work for service providers.

Conditions are not as strong as a year ago, but fears about some mining services stocks may have been overstated.

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