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Australia may be struggling with a two-speed economy but holders of investment portfolios look beyond such trivialities to long-term gains through a wide exposure to quality stocks in different sectors and geographic locations. The three common denominators to look for are balance sheet strength, good management and a growth path.
The world’s largest listed mining and energy company has the balance sheet strength and resource project profile to weather what chief executive Marius Kloppers expects will be a long and difficult path for Europe to get back on track for economic growth.
Just how Europe’s problems dampen growth in China remains to be seen but Asia as a trading bloc is strengthening inter-regional trade that will help diffuse the impact.
If there is any material softening of demand from China it will put the resources boom into a hiatus and cause substantial mine closures.
BHP Billiton’s large low-cost operations will continue to produce, however, and can expand further through the cycle at the expense of other producers’ higher cost mines.
While BHP is in a challenging situation when it comes to the question of expanding its mineral operations due to a regulatory environment that makes acquisitions difficult, its petroleum division still has substantial room for growth and its shale gas operations in the United States should turn into a big money spinner in coming years.
If Europe manages to get its house in order without having a significant impact on world growth forecasts, BHP’s free cash flow will continue to grow and that will enable the company to shift to a considerably higher sustainable dividend payment.
The mining services giant was perceived to have performed poorly during the initial years of the mining boom. However, those times were driven by higher commodity prices, when Orica thrives on higher mine throughput.
That throughput is only now being delivered as global mine production catches up to the surge in Chinese demand in the past decade.
As a supplier of mining services such as explosives, ground consolidation and rock bolting and a supplier of a wide range of chemicals to the mining, agriculture, food and beverage, water treatment, and construction industries, Orica gives investors access to the mining boom without a high exposure to commodity prices.
Unfortunately, the group’s public reputation has taken a battering in recent months because of a series of chemical spills at its operations in Newcastle, NSW. Like any large modern company, bottom-line profit is better served by a good track record on safety and environmental performance.
The company will spend a lot of money fixing the problems and its reputation but the hammering its share price took over the issue provides a buying opportunity.
The past couple of years have been tough for the insurance and reinsurance markets but QBE has consistently proved its superior risk management practices with its low levels of exposure to natural catastrophes.
This has not stopped the share price being punished along with the rest of the market as each new earthquake, tsunami or hurricane battered both the northern and southern hemispheres.
The outcome from a period of extreme natural events is an increase in premiums. Assuming a more normal cycle of catastrophes follows, high-quality insurers and re-insurers will enter a period of high earnings growth. QBE has a track record of making the most of such recovery periods.
This company represents another opportunity for investors to access the mining boom through a service provider and minimise exposure to commodity price movements. WorleyParsons has balance sheet strength and its management is highly regarded.
It provides technical, operational and support services to both hard rock mining and energy markets across the globe. From its feasibility studies to engineering, construction and project management, environmental services and a pit-to-port capability, the company is well placed to prosper as mining volumes increase to meet emerging market requirements for industrialisation over the next decade and beyond.
The nation’s only global scale goldminer is a beneficiary of the extraordinary rise of the gold price since the start of the millennium.
While gold has struggled to get back above $US1800 an ounce in recent months, the industry average cost of production is about $US700 an ounce, so producers are making great profits. But Newcrest Mining’s cost is substantially lower at less than $US500 an ounce when copper credits from its operations are included. Its cost profile is set to drop in the years ahead to below $US400 an ounce in 2016. This is an important forecast as the gold price is sentiment driven. For investors in gold, it is vital to choose low-cost producers to minimise risk in what can be a volatile commodity.
Newcrest has been well managed in recent years and is targeting production of 4 million ounces a year by 2016 compared with last year’s output of 2.7 million ounces.
The group has low gearing, a strong balance sheet and the cash flow and debt facilities to advance its production targets through a planned development of its resource base in Australia, Indonesia and West Africa.
The listed property sector took a battering coming out of the global financial crisis as most companies, including Lend Lease, were over-geared and had expanded too quickly overseas, spreading themselves too thin.
Fortunately the equity markets in 2009-10 came to the rescue of the sector and recapitalised many balance sheets.
Lend Lease chief executive Steve McCann has consolidated the company’s operations over the past four years into three core markets in Australia, Singapore and Britain and disposed of non-performing assets while concentrating on large-scale projects that attract well-funded and long-term partners in the private equity and sovereign wealth fund spheres.
The company has also integrated its operations and provides full property development, management and investment services. Proving it can make high returns from projects such as the $6 billion South Barangaroo project on Sydney Harbour will be the catalyst for a substantial re-rating of the group.
From the perspective of shareholder return, the bank has underperformed in recent years, so investors putting their money into the group are betting that chairman Michael Chaney and chief executive Cameron Clyne can return the focus to providing an above-average return on shareholder funds.
It was the prime focus for Chaney when he built Wesfarmers into a multibillion-dollar conglomerate and he wanted Clyne as CEO as he also has a clear focus on shareholder return.
The path ahead is not easy as Australians are no longer the free-spending addicts of debt they were before the global financial crisis.
Corporations also have lower leverage requirements, so banks in general have passed the golden age of high returns based on an ever-growing loan book.
Nevertheless, productivity gains, operational streamlining and a focus on wealth management and financial services can deliver good dividends and reasonable growth prospects. Each of the big four banks offer similar potential through different strategies, with ANZ perhaps offering the most blue sky with its focus on Asia.
The integrated energy company explores for and extracts gas, and produces electricity from gas and renewables, as well as retailing the juice. Buying Origin Energy today gets you early entry to its multibillion-dollar liquefied natural gas export project in Queensland based on the nation’s largest known reserves of coal seam gas.
The communications giant has not been on many top-pick lists for a decade as it has battled for survival in a highly uncertain regulatory environment.
Now that certainty is returning to the sector and Telstra has proven it can compete and thrive in the growing mobile market, there is a renewed growth story in the stock which, when combined with its highly attractive 9 per cent dividend yield, makes it worth consideration.
Cyclical stocks have not had much attention since markets turned downwards at the close of 2007 but Brambles, with its global pallet and reusable plastic containers business, has been achieving growth even in difficult European markets.
It is well placed to benefit from a better than expected global outlook over the medium term, particularly from its large United States business.