Miners should continue to exploit profit lode

IF LAST spring taught us anything, it was that even the mining sector is vulnerable to the market miseries unfolding abroad.

IF LAST spring taught us anything, it was that even the mining sector is vulnerable to the market miseries unfolding abroad.

But despite that sudden collapse in commodity prices the value of some resources fell by close to 40 per cent over September and October investors can confidently expect the big resource stocks to make gains this year.

A steady resurgence in commodity prices since November has not been fully reflected in the share prices of the big diversified miners such as BHP Billiton and Rio Tinto. Both have a strong suit in iron ore, a weak spot in aluminium, and big growth plans for copper.

Both should benefit from continuing strong demand for coal and iron ore from Chinese customers, even if the steel scene is milder than this time last year. But despite BHP's greater diversification, canny investors have a slight preference for Rio in the medium term, based on

a couple of factors.

First there is a belief

that Rio's Pilbara ports are more easily expanded that BHP's, meaning Rio will

find it easier to increase its exposure to the iron ore

cash cow in the decade ahead.

BHP, meanwhile, faces a massive capital spend to build its outer harbour at Port Hedland estimated to be more than $22 billion and will have to commit an even bigger sum to develop Olympic Dam in South Australia.

Rio's spend on growth is not quite as big, meaning it should enjoy more free cash flow in the next couple of years, and will have more capacity for share buyback programs and the like.

Then there's BHP's recent venture into shale gas, which due to depressed gas prices in the US, may be an investment that takes years to pay off.

Yet both the big miners remain a safer bet than Fortescue Metals Group, which is entirely leveraged to the iron ore price.

With Chinese buyers paying about $US140 ($A131) for something that costs about $50 to produce, exposure to iron ore should continue to serve Fortescue well for many years to come.

For this reason most analysts consider the company a good bet in the short term at least.

Yet it's possible that last year's prices above $180 a tonne will never again be matched. More and more supply is coming into the market.

Fortescue will be among those increasing supply, but its growth targets are as ever highly ambitious in terms of cost and schedule.

Two key players in Fortescue's six-year run founder Andrew Forrest and Manhattan-based investors Leucadia National have scaled back their involvement in recent times.

Mr Forrest has moved out of the chief executive's office and into a less hands-on role in the chairman's lounge. Leucadia, meanwhile, has been selling down a stake that once stood at 9 per cent. That stake is now below 1 per cent after another big sell-down on January 25.

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