Investors should weigh up the rest of the world’s ability to unlock resource reserves when they consider their exposure to Australian coal and energy stocks, a leading funds manager says.
As technology improves and countries look to tap previously hard-to-get-to resources, Australian coal and energy companies will be under valuation pressure, says Australian Ethical Investments portfolio manager Nathan Lim.
Resource companies account for 28 per cent of the capitalisation of the benchmark S&P/ASX 200 index.
Investors who believe the so-called “China slowdown” will be the primary impact on the Australian resources sector could be missing the broader story, Lim says.
“What’s being factored in to many [Australian resource company] valuations is a cyclical slowdown [in China] but the technological advancements and investment in infrastructure countries are making to unlock resources they are sitting on impacts longer term value,” he says.
In particular, Lim points to the estimated 150 billion tonnes of coal in Mongolia – China’s neighbour – which he says is equivalent to 650 years’ of China’s current coal imports.
“What has prevented China and other countries from developing their own resource potential has been technology and infrastructure,” he says.
“The United States is showing the world what is possible when both are applied to a problem [in relation to shale oil].”
US President Barack Obama says he plans to reduce America’s dependency on foreign oil by boosting domestic use of shale gas.
Lim says he expects the United States to export more energy eventually as it begins to unlock new reserves for its domestic use.
There are already 12 different liquefied natural gas projects in North America in the process of being developed.
Last week, The Australian Financial Review reported that BHP Billiton was considering shipping a portion of its United States shale gas reserves to Asia as part of a plan that would pose a direct threat to exports from Australia’s liquefied natural gas sector.
“For the first time shale is being talked about as a viable option for base-level power, that’s not a conversation people were willing to have before,” Lim says.
While Lim’s view of the world’s ability to unlock resource reserves is likely to have a negative impact on the valuations of the Australian resources sector, others such as Michael Kodari of Kodari Securities believes many Australian resource companies remain undervalued.
He says resource stocks with price-earnings ratios of seven to eight remain good value based on existing contracts and China’s GDP growth pointing in the “more sustainable” 7 per cent range.