Deutsche Bank: 5 reasons to bet on mining stocks

Fortescue mining boss Andrew Forrest. Photo: William West/AFP/Getty Images

Australian mining stocks are back in favour after commodity prices and volumes surged.

Australia’s key commodity prices continued to rip higher in January, according to the RBA’s Commodity Price Index, with prices jumping by 5.5%, following a 8.8% gain in December. That left the index up 55.7% from a year earlier, thanks largely to ballooning iron ore and coking coal prices, Australia’s largest commodity exports by dollar value.

Amid that data, Deutsche Bank analysts have listed five reasons to stay bullish on the stocks:

1. Miners are still in an earnings upgrade cycle: Share prices look to be pricing in current earnings forecasts, but rising spot prices imply earnings upgraded of 50% is possible. Added to that many companies price to earnings ratio are in single digits using spot prices, which would mean the stocks can continue to rise.

2. Free cash flows reaching record highs means higher dividends: High commodity prices and restrained capital investment should create record free cash flows for miners. Free cash flow should ensure higher dividends and potential buybacks for shareholders

3.Foreign investors still underweight: The data show limited buying of non-financials by foreign investors, consistent with our impression of light positioning in resources.

4. China momentum: China’s cyclical upturn looks to have gathered momentum The Spaceknow Satellite Index confirms the recent firming in growth. Nominal GDP growth has doubled to reach 11%, and lead indicators are positive. This would be positive for miners

5. China caution exaggerated: China’s capital expenditure/GDP ratio of 45% is unprecedented. Still the data on steel use per person tells a different story – China uses 20% less steel than Japan and the US did in the 1960s/70s.

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