Australia's biggest mining houses are counting on the dramatic fall in the value of the Australian dollar and a healthy global appetite for industrial metals to help deliver fat profits this year.
But analysts warn signs are emerging of a turn in the commodities cycle, which could reinflate the Australian dollar down the line and deflate demand for metals.
"Commodity markets have weakened sharply in recent months," said David Thurtell, commodities analyst for Commonwealth Bank of Australia.
"Concerns about world growth and hence metal demand have offset lingering doubts over the adequacy of supply of some metal commodities," Thurtell said.
For now at least, having ridden out the Internet boom and weathered desertions to the new economy, the top end of Australia's resources sector is basking in its brightest fundamental outlook since the early 1990s.
A decade-long splurge in capital spending on new projects is mostly over and debt has been roped in.
"Expect high or record high profits for the next six to 12 months. But the market is looking beyond that, out say 18 months, where profits are expected to be lower due to declining industrial growth," said Dicksons mining analyst Ron Cameron.
PROFITS HEADED UP
Accelerated industrial activity to date has lifted demand for copper, zinc, aluminium and nickel, all staple Australian exports.
At the same time, the plunge in the Australian dollar's exchange rate to all-time lows below US$0.53 has increased the home currency value of those exports, traditionally bought and sold in U.S. dollars.
"This is about as good as it gets," said Nick Raffan, a fund manager for Zurich Financial Services.
Leading mining houses The Broken Hill Pty Co Ltd , Rio Tinto Plc/Ltd , MIM Holdings Ltd , Pasminco Ltd and WMC Ltd are each forecast to post sharply improved profits this year, ranging from 14 percent to 600 percent.
"They are all in very good standing right now," said BNP Equities mining analyst Peter Chilton.
BELOW NPV VALUES
But how will the miners fare if boom turns to bust?
Most analysts reckon the top five miners are trading under net present value (NPV) - the sum of future earnings discounted back to today's values.
But rather than attract fresh investors, this has heightened speculation of takeovers, although the top five have shown no interest in preying on each other.
WMC, capitalised at A$8.4 billion, is frequently cited as a potential target, given a lacklustre share performance and emerging new assets.
On their own, market capitalisations of Australian mining companies fall short of U.S. investment fund cut off levels, loosely marked at US$10 billion, which has further fueled merger and acquisition speculation.
"Expectations that the big mining houses would cannibalise each other, thereby increasing their market caps has not occurred," said a corporate mining strategist.
Salomon Smith Barney analyst Ian Maxwell believes Rio Tinto's NPV warrants a share price of $27.80 a share, A$1.12 higher than its last closing price, given its diversified portfolio.
Rio Tinto's "late cycle" commodities, coal and iron ore are well positioned and the company's copper assets are set to perform, he said.
Similarly, Brian Sheehan of ABN Amro Morgan believes MIM is a bargain at its last closing price of A$1.06, given the company's growth in recent years and the success of cost reductions at its copper, lead and zinc mines.
"Sure U.S. growth is slowing, but you may see a pick up on the other side, particularly in China, which consumes a lot copper," Sheehan said.
China is the world's second largest user of copper, importing almost half the 1.7 million tonnes consumed annually.
"We believe MIM is cheap," he said, adding the stock was worth closer to A$1.52, given his NPV evaluation.
Recent financial performance of Australia's top five basemetals mining houses based on market capitalisation.
Company RIC Market YTD 3-month Perf v Profit P-Ecap A$b perf perf Index* A$m£2001 Rio Tinto+ 39.3 -18% 0% -13% US$1,46011.86 BHP 33.1 -4% 0% 0% 2,82011.80 WMC 8.0 -14% -11% -9% 7938.80 MIM 1.8 -32% -7% -29% 2188.40 Pasminco 0.89 -53% -20% -53% 1655.30*Year-to-date performance versus S&P/ASX 200 Resources£Forecasts for Rio, WMC are calendar 2000, rest are 2000/01+Rio Tinto market value includes Rio Tinto Plc Sources: Reuters 2000, Barra Global Estimates.