BHP And RIO Trade Lower As Iron Ore Continues To Unravel

Posted on | by Todd | Leave a Comment on BHP And RIO Trade Lower As Iron Ore Continues To Unravel

The Spot Iron Ore price continued to trade lower overnight, losing 4.6% to reach a 6-month low of $63.20 per dry tonne. This is a 33.5% drop from the high of $95.00 last traded on February 21st.

It’s worth noting that the sharp selloff is picking up pace just weeks away from the delivery of the Australian Federal Budget.

Since Iron Ore remains the country’s single biggest export, Federal revenue projections are highly sensitive to the outlook for Iron Ore prices.

Both RIO and BHP have traded lower on the open,  reaching new 5-month lows of $57.60 and $23.30, respectively.

Unless Iron Ore stages a dramatic rebound, we look for the the next key support level in RIO at $56.20, and at $22.60 for BHP. 


 

BHP Gets A Boost

Posted on | by Todd | Leave a Comment on BHP Gets A Boost

Yesterday’s 5% rally in BHP left a many investors wondering what was driving the shares on a quiet Monday session.

The main reason was a  report that Elliott Advisors suggested the company could unlock shareholder value by spinning off US Petroleum and collapse of the LTD and PLC shareholdings.

The idea is that the Elliott plan would accelerate the release of value and franking credits. Of course, the $6.00 rally in Crude Oil since March 27th has also been a boost to BHP shares.

Our ALGO engine generated a buy signal  for BHP on March 13th at $23.65.

We remain cautious of the extended valuation of equities, in general, and suggest placing a stop in the $24.40 level on long positions.

Chart BHP

Iron Ore Gets Hammered

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With the financial media focused primarily on the US missile strike in Syria, many investors didn’t notice the 7% drop in Iron Ore prices on Friday.

The spot price of Iron Ore fell $5.50 to $75.45 yesterday. This is over 20% lower than the February 21st closing price of $95.00.

Making matters worse, the September contract for Iron Ore on the Dalian exchange also closed 7% lower after trading down to its 8% limit for most of the session.

The sharp fall in Iron Ore will have its biggest impact on BHP, RIO and the Aussie Dollar.

The AUD/USD closed the New York session at a 1-month low of .7495. This is the first close below .7500 since early January and opens up the next support level at .7425.

Investors who would like to profit from a lower AUD/USD can look at the BetaShare YANK Exchange traded Fund. This is an inverse fun which gains value as the AUD/USD falls.

Call in for more details about YANK and the other ETFs that we cover.

Chart – YANK

RIO and BHP Are Close To Support

Posted on | by Todd | Leave a Comment on RIO and BHP Are Close To Support

The share prices of  RIO and BHP are both approaching key support levels which could create investment opportunities.

The are both trading below their 30-day moving averages but are close to support $58.80 and $23.50, respectfully.

The attached charts show that these support line have held and became good buying levels for a move higher over the last six months.

However, we are mindful of the importance of exports to China for both of these companies. Overnight, China’s five largest banks reported earnings which showed steady results but increases in the  percentage of non-performing loans tied to real estate.

It’s worth noting that Chins’a top five banks are considered the largest in the world in terms of assets. A sharp contraction in any of those five could trigger weakness in RIO and BHP

Chart – BHP
Chart – RIO

 

BHP & RIO – Where is Support

Posted on | by Leon Hinde | Leave a Comment on BHP & RIO – Where is Support

Our Algo Engine has triggered multiple buy signals across the major resource names, both in metals and in energy.

With the peak to trough sell-off among the sector extending between 13% – 20% it’s likely we find some value investors stepping back in to the market.

We’re comfortable with select exposure in BHP, RIO, S32, WPL, OSH, ORG but caution investors that stop-losses below the recent lows will be a prudent way of managing risks.

It seems unlikely that any buying interest from this level will carry the above names to new near-term highs. We’re of the view that a corrective bounce will top out at 5 – 7% above recent lows

We see the recent volatility in oil and iron ore, being primarily driven by US Dollar swings rather than related to any fundamental factors and remain cautious of negative news flow from China’s unsustainable debt problem within their shadow banking industry.

Chart – BHP
Chart – RIO

 

 

 

BHP & RIO – Algo Signals

Posted on | by Leon Hinde | Leave a Comment on BHP & RIO – Algo Signals

Our Algo Engine is now flagging “higher low” structures in a  number of the large cap commodity names; across both metals and energy sector.

In particular, BHP and RIO are now at levels where a technical bounce is likely to occur.

Although, we struggle with the timing of establishing new long positions, given our current valuation concerns at an index level.

We’ll watch the price behaviour in BHP and RIO this week and look for evidence of the short term momentum indicators turning positive.

Chart – BHP

Chart – RIO

 

BHP – 1H17 Earnings

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The rebound in Iron ore prices helped BHP post a first-half profit of AUD 4.2 billion. The resource giant announced its underlying profit for the six months to December 31st surged to USD 3.24 billion from USD 412 million during the same period a year ago.

The result was slightly better than the street’s forecast of USD 3.1 billion.

The company declared an interim dividend of 40 US cents per share, which is much better than the 16 US cents it paid a year ago. This takes into account the USD 155 million charge in relation to the Samarco dam failure in Brazil.

BHP’s bottom line has benefited from strong gains in commodity prices during H2 2016. Prices of Iron Ore more than doubled during 2016 on improved demand from China, while Crude Oil prices have recovered more than 40% from the multi-year lows hit in February last year.

The price correlation between BHP and Iron ore is very strong. Since posting a low of $14.10 in late January 2016, the share price has followed Iron Ore higher and almost doubled; reaching a high of $27.50 on January 25th.

We’ve been selling $27 calls over BHP for an additional $1.00 credit per share.

Chart – BHP

 

BHP Production Results

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BHP’s recent production results were on the weak side, with lowered expectations in metallurgical coal, energy coal and copper.

The firm has cut its guidance for copper production by 2%, but has maintained their FY 2017 production guidance for other commodities. Copper and energy coal were the weakest spots, with those numbers missing analysis’ forecasts by 11% for both commodities.

Metallurgical coal output was 7% weaker than forecast, while Iron-ore and petroleum production was broadly inline with expectations.

Based on these numbers, BHP will need to deliver a significant uplift in production rates during the 2nd half of 2017 for copper and coal if the upper-end of their guidance is to be achieved.

We believe that BHP is up for the task. At current prices, shares are trading on +11% free cash flow and have a positive chart pattern over the last 12 months. Despite the weaker production result, we see scope for a move to $28.00 in the medium-term.

Chart – BHP