Suffers when things go wrong, like now
A PANIC OF SORTS hit the resources equity markets last week when two unrelated sets of bad news combined to knock back the shares of major mining groups BHP Billiton, Xstrata and Rio Tinto. The bad news consisted of the announcement by the Australian government of its intention to push for a windfall “super tax” on mining companies while the release of some disappointing economic numbers from China triggered renewed worries about the global economic recovery.
BHP Billiton shares tumbled 18% on both the London Stock Exchange and the JSE, where they fell from a 12-month high of R259 to around R216. Xstrata and Rio Tinto took similar thumps. But SA investors can only get at those stocks using their foreign investment allowances, while they can buy BHP Billiton using rand.
I think investors have been presented with a buying opportunity in BHP Billiton, which is the world’s largest diversified resources group and has put in a superb performance over the past five years. Its current share price is still almost five times up on what it was back in 2005.
But before buying the stock you need to accept two fundamental assumptions. The first is that the global economy is recovering – albeit slowly – and the commodity “super-cycle” remains intact. The second is that Australia’s proposed super tax doesn’t get enacted in the draconian form proposed by Kevin Rudd’s government. The proposed tax still has to go through the full legislative system in Australia before it’s approved and implemented.
There’s been massive opposition to it across the board in Australia, from the mining industry as well as the main opposition parties. To use the vernacular: feeling is that Rudd “has a few roos loose in the top paddock”. There must be a good chance it will get toned down or even scrapped should Rudd lose the next election.