Mining Companies Driving Bullish Sentiment in Australia

by Justin Dove, Investment U Research
Thursday, September 15, 2011

As precious metal and rare earth prices remain high, so do the margins for mining companies. Thus, companies such as BHP Billiton (NYSE: BHP) and Lynas Corp. (OTC: LYSCF.PK) stand to spend plenty on increasing mining production.

Australia is a huge benefactor to this recent trend. Its rich natural resources and close proximity to China and other emerging economies helped it avoid the worst of the financial crisis. Mount Weld was even billed as the savior to China’s rare earths monopoly.

According to the latest Australian Bureau of Statistics Survey of Capital Expenditures, Australian Chief Financial Officers expected major growth in corporate expenditures in June. The numbers indicate fiscal 2012 capital expenditures should increase 24 percent more than the record investments made last year. That would equate to an infusion of AU$148.8 billion, or about US$155 billion, into the Australian economy over the next year.

Not Just Mining

The mining industry’s planned AU$82.1 billion capital expenditure (capex) makes up the majority at 55 percent. But while there wasn’t much growth over the past year in that sector, spending is starting to catch up in other areas. The manufacturing sector is expected to increase its capex by 10.5 percent.

Across all industries, spending on building and structures is expected to take the largest jump. Building and structures will reportedly increase almost 50 percent to AU$98.6 billion. If these expectations are accurate, the added investments in construction should help drive the broad economy.

So if all this increased money does come to fruition, who stands to benefit?

The Largest Australian Bank

The most immediate benefactor for U.S. investors to a rising Australian economy may be Westpac Banking Corporation (NYSE: WBK). As companies pump money into capital expenditures, parts of these investments will be through debt instruments.

Also, increased employment and a better economy stand to benefit Australian banks. Even if the numbers from June don’t hold up, Westpac may be at a low point, anyway. Greek and Eurozone fears have suppressed its stock despite low direct exposure to Greek debt.

But check out the fundamentals…

Westpac has a P/E ratio of 8. Single-digit P/E ratios are usually standard with large banks, such as Barclays PLC (NYSE: BCS) and UBS (NYSE: UBS), these days. But once all the Eurozone fears die down, these P/E ratios should eventually return to the double digits.
EPS is high for a bank at $12.42. Compare that with paltry figures from Barclays at $1.32 and UBS at $1.81. Goldman Sachs (NYSE: GS), which has a similar market cap to Westpac, is at $10.20, with a double-digit P/E.
Westpac offers great dividends. The dividend yield is a whopping 8.10 percent. Since 2006, its biannual dividend has never been below $2. In May, it paid out $4.089 per share. Its second annual dividend is due in early November. There’s no telling if it’ll be able to match such a high dividend with all the economic troubles since May. But not many investments are paying out four percent annually right now, much less up to eight.

Forward-Looking Statements

These numbers from the ABS are merely projections based on a survey of CFOs. With all the changes in the global economy lately, things may have changed, as the statistics represent sentiment in June.

Considering gold and rare earths are continuing to boom, it’s likely miners haven’t slowed pace. But it’s probably wise to hold off on companies benefitting from a rise in Australian construction, such as James Hardie (NYSE: JHX), until further notice.

However, for contrarians not scared off by the Eurocrisis, Westpac may present a decent opportunity with the upside of a possible surge in the Australian economy.

Good Investing,

Justin Dove

Article by Investment U