Resource Sector Investment Overview

 

Content supplied by Breakaway Research

Australia’s Resource Sector has always been reliant on stock market investors to provide the capital required for the capital intensive development of mineral projects or the funding of higher risk exploration to locate new deposits.

Speculative share price rallies have often been associated with mineral booms with the most famous being the Poseidon Boom in 1969-70 when the discovery of nickel ore resulted in the Poseidon share price climbing from 80 cents to $280 before collapsing.

Junior explorers in both mineral and oil exploration continue to offer the high risk–high return investment opportunities where the ‘next drill hole’ may discover a new resource capable of innumerable increases in the company’s share price. However, in contrast, the sector includes major global diversified houses such as BHP Billiton and Rio Tinto which pride themselves on diversified mining portfolios which limit the risk to any single commodity, operation or country. Between these extremes are numerous mineral and energy companies which offer varying degrees of operational risk, commodity leverage and exploration potential.

Many commodity prices are driven by the outlook for global economic growth and industrial demand. Gold can be an exception and at times is considered a hedge against inflation or as a ‘safe haven’ currency. Gold like most other commodities is denominated in US dollars, therefore the gold price is attributed to the strength of the US dollar. Gold mining companies offer earnings leverage to the gold price, itself potentially responding to other macro-economic factors and not necessarily supply-demand fundamentals.