Resource stocks to benefit from lower $A
Resource companies are among those expected to benefit from the decline because they earn much of their revenue in US dollars, while their costs are largely denominated in Australian dollars. Among companies expected to receive the biggest benefit are Atlas Iron, Alumina and Yancoal, according to Credit Suisse. Fortescue Metals, BHP Billiton and Rio Tinto are among those that will receive least kick to their earnings.
However, it is not just mining companies that will welcome a weaker currency. BlueScope Steel says a 1 per cent fall in the dollar will lead to a $2 million upward adjustment in earnings before interest and tax.
"A US105¢ to US95¢ decline would have led to a $20 million EBIT benefit to the company," a spokesman said. "And a lower dollar has more benefits to us in terms of things that are harder to measure, such as the volume of potential steel imports coming into Australia. At US95¢, for instance, the Australian market becomes less attractive for importers."
Watermark Funds Management director Justin Braitling said fund managers were becoming concerned about a recession next year, and this would make it "very tough" for cyclical industrial stocks.
With the capital cycle rolling over, economic activity would probably be much weaker next year. "The best strategy at the moment would be to invest in banks and resources," he said.
Brokerage Credit Suisse predicts the dollar will drop to US85¢ over the next year. "In a strict accounting sense, resource stocks ought to benefit from a fall in the Australian dollar compared to the greenback," the brokerage said.
Frequently Asked Questions about this Article…
A weaker Australian dollar can boost resource company earnings because many resource firms earn a large share of revenue in US dollars while their costs are mostly in Australian dollars. When the AUD falls versus the USD, those US-dollar revenues convert into more Australian dollars, lifting reported earnings.
Credit Suisse says smaller and mid‑tier resource names such as Atlas Iron, Alumina and Yancoal are among those expected to receive the biggest benefit from a weaker Australian dollar.
According to the article and Credit Suisse commentary, large miners including Fortescue Metals, BHP Billiton and Rio Tinto will receive the least kick to their earnings from a falling Australian dollar.
BlueScope Steel says a 1% fall in the Australian dollar would lift its earnings before interest and tax (EBIT) by about $2 million. The company also stated that a move from US105¢ to US95¢ would have produced about a $20 million EBIT benefit.
Brokerage Credit Suisse predicted the Australian dollar would drop to around US85¢ over the next year.
BlueScope notes that a lower dollar makes imports less attractive. For example, at US95¢ the Australian market becomes less appealing for importers, which could reduce the volume of potential steel imports into Australia.
Justin Braitling of Watermark Funds Management said fund managers are worried about a possible recession next year, which would make cyclical industrial stocks 'very tough.' He suggested that the best strategy at the moment is to invest in banks and resources.
No. The article points out that it's not just miners who benefit. BlueScope Steel — a non‑mining industrial — explicitly stated it gains from a weaker dollar, showing other companies with US‑dollar revenue exposure can also see improved earnings when the AUD falls.
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