In a report to clients, Australia’s largest independent stockbroker sees a new investment approach from cashed-up Chinese and east Asian companies it views as little more than shopfronts for their governments.
Southern said the Chinese were changing tack because a frontal assault on Rio Tinto had not worked.
“So armed with the prospect of cheap finance, they are buying companies with huge growth potential which are not being captured in brokers’ estimates,” Southern said.
“Resource analysts are basic sceptics when it comes to emerging production companies and almost always refuse to value production until they physically see it.”
Southern said China Inc, a reference to China’s giant state-owned resource companies, would look to come in under the stock market’s radar to buy assets given no value in the point estimate-based world of the analyst community.
The stockbroker used Felix as a prime example.
“The buy-side analysts reckon the Chinese have lost their marbles in bidding $18 for a stock they couldn’t see being worth more than $14. But roll forward Moolarben production and you find another 10 million tonnes of production. That production is not in any analyst’s valuation. This is the arbitrage the Chinese are working.”
Southern made a call that Aquila Resources shares could ultimately end up at $10 in assessing the cost of developing new projects, such as the China First project associated with Clive Palmer, and Gina Rinehart-owned Hancock Prospecting’s Alpha Coal and Kevin’s Corner projects, all in Queensland’s Galilee Basin.
“Gina Rinehart is talking this project next door to fellow billionaire Clive Palmer’s 30 million tonne per annum planned coal mine but look at the dollar cost of these projects – $16 billion,” Southern said.
“They have to build an entirely new rail network from these areas that are 500 kilometres from any port and that volume from these two projects is too large to go through existing ports in Queensland, and hence Palmer has been talking about building an entire new coal export facility at Abbot Point for multiple billions.”
While noting reports that Rinehart had been talking to Coal India about offtake and funding agreements, Southern maintained its view about India’s growing coal demand over the next five years.
“Consolidation is happening. Time to look at existing and emerging coal players of all market caps, be it Whitehaven Coal, Centennial Coal, Riversdale Mining, or Rey Resources and Jameson Resources at the microcap end.”
Patersons Securities coal analyst Andrew Harrington recently identified Whitehaven and Aquila as possible takeover candidates.
He did not view Macarthur Coal as a takeover candidate given its shareholder offtake commitments, which include two major steelmakers.
Broker ABN Amro Morgans echoed this view on Macarthur, saying the company was not a clean takeover target.
ABN has rated Macarthur, Centennial, Whitehaven, New Hope, Aquila and Riversdale as stocks to buy and said it continued to see positive signals from metallurgical coal markets.
Back in mid-May, Southern said Felix shares could rally to $15 with or without a move from Yanzhou. The price was around $10.60 at the time.
