Sent: 10-04-2013 11:24:02
In this issue:
Return to full article list
HomeFree weekly newsletterSelf Managed Super Fund ArticlesContact usLogin
Still No Escape for Resource Sector Investors
In a market segment facing a cyclical decline of historic proportions, resources companies are finding it extraordinarily difficult to differentiate themselves sufficiently to avoid the market vortex. Lynas Corporation is a topical example of the predicament in which the resources sector finds itself.
After years battling aggressive opposition from local communities and organised environmental lobby groups targeting its advanced materials plant in the Gebeng industrial estate in Malaysia, Lynas produced its first rare earth material products for sale in the March quarter and, with a corporate sigh of relief, is now on the way to reaching its first stage production target of 11,000 tonnes a year during the current quarter.
Lynas has made the transition from a capital using company to a producer. Valued by the market at just under one billion dollars, it has already invested over $800 million in its WA mine and associated Malaysian processing plant. Finally, it is starting to build value, albeit well short of an adequate return on the capital employed.
ABC television interviewed the incoming chief executive of the company last Thursday beginning with an observation of how investors had been driven away by the events surrounding construction and commissioning of the Malaysian plant.
Eric Noyrez, who took up his new role on 31 March, spoke optimistically about the prospects of the company, now that production had commenced, and its commitment to its Malaysian production centre and the safe operation of the plant.
With the Malaysian parliament dissolved, elections are due within eight weeks. A change in the governing party, in what is expected to be a uniquely close election after more than 50 years of single party rule, will almost certainly subject Lynas to another review but opposition leader Anwar Ibrahim has publicly said the plant can continue to operate if it meets the standards that have been set.
The Lynas share price is now as much as 30% lower than where it had been trading in January. There has been no sign of any post-production share price improvement.
Looking at the company in isolation, it is tempting to say that the lingering effects of its Malaysian travails are at the heart of its lower share price but Lynas has not been treated much differently than its peers in the sector.
The correlation between monthly movements in the Lynas share price and movements in the Bloomberg rare earth mineral resources index, made up of the share prices of over 20 rare earth producers and mine developers from around the world including that of Lynas, has been 0.86. Since the beginning of April 2008, the index has fallen by 42.9%. Over the same period of time, the Lynas share price has fallen by 42.1%.
These movements seem to suggest Lynas was destined to suffer a similar share price fate whatever had happened in Malaysia.
The performance convergence within the sector is driven home even more emphatically through the perspective of the broader market. Over the same time period referred to above, the ASX small resources index declined by 47.9%, only slightly more than the two rare earth price indicators but not at a materially different pace.
These illustrations reflect an historic rout in resource sector share prices even as investors have been embracing small cap stocks in other segments of the market. The Russell 2000 share price index which covers small stocks in the US market, for example, has risen by 25% since December 2011. Within the Australian market, smaller industrial stocks have been going up as the smaller miners have been sold. The performance differential since December 2011 between the smaller ends of the industrial and resources markets has been a staggering 66 percentage points.
So far in April (i.e. after only four trading days in the month), the small cap resources sector has fallen by over 9%.
One would hope, at some point, that indiscriminate repricing of stocks in the sector will run its course. History suggests it will but, as always, the tension is in the timing. Will that happen this quarter, this year or this decade?
Meanwhile, market differentiation counts for little and there seems little reason to worry about stock selection until the timing of the turn can be clarified. Then, the shackles will be removed from those stocks most capable of responding positively to the change and investors might again experience the unusual sensation of stock price movements reflecting the circumstances of individual companies.
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.