BHP Billiton, RIO Tinto, Woodside Petroleum, Gold & Copper Analysed Plus Stocks to Avoid

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This week…
• Aussie mining companies
to avoid
• Outlook for Dr Copper
• BHP, RIO and WPL analysed

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Invast.com.au 1800 468 278
General Advice & Risk Warning
Please note that any advice given by Invast staff is deemed to be GENERAL advice, as the information or advice given
does not take into account your particular objectives, financial situation or needs.
Therefore at all times you should consider the appropriateness of the advice before you act further.
CFDs and Forex are leveraged products and carry a high level of risk and are not suitable for everyone. You can lose
more than your initial deposit so you should ensure CFD and Forex trading meets your investment objectives. We
recommend you seek independent advice. Strategies and charts used in this presentation are for example only. You are
reminded that past performance is not indicative of future performance.
Invast Financial Services is regulated by ASIC. It's important for you to read and consider the relevant Product
Disclosure Statement and Financial Services Guide which contains details of our fees and charges before you decide
whether or not to acquire any financial products. These documents are available at www.invast.com.au
Invast Financial Services Pty Ltd ABN: 48 162 400 035. Australian Financial Services Licence No.438 283

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This week we look at the following topics:
• Aussie mining companies to avoid
• Outlook for Dr Copper
• BHP, RIO and WPL analysed

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Dear Readers,
We published our 2015 Outlook Guide last month,
looking at global markets and touching briefly on ASX
listed shares in the last section. February is an
interesting and eventful month for the Australian
share market. We aim to dedicate the next four weeks
to Australian shares and this is made more exciting by
the rollout of Invast’s DMA CFD offering, which means
many large global shares can now be traded – either
long or short.

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February sees many companies who have a 30 June financial year end date reporting
their interim results. Some companies will be reporting their full year results, so it is a
very busy time in the markets. Our analysis will be broken up as follows:
Week commencing 2 February 2015: Outlook for Australian banks
Week commencing 9 February 2015: Mining companies likely to remain losers
Week commencing 16 February 2015: Our six key picks & further analysis
Week commencing 23 February 2015: Result review & upcoming dividends
Week commencing 9 February 2015: Mining companies likely to remain losers

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Last week we wrote about the Australian banks which continued to rally strongly
following the RBA’s decision to cut rates by another 25 bpts to 2.25%. We articulated
our view that Westpac was the most attractive among its peers. Westpac shares have
added around 7% between the publish date of that report and the current share
price as of the time of writing. The exact percentage figure will change by the time
you read this report, our point is that a 7% gain within one week is a fairly good
outcome and not one which is likely to repeat weekly. You need to take caution and
context in what drives banking results – something which we touched on extensively
last week. If that Westpac gain touches 10%, we would be inclined to take profit and
steer away from all four major banks completely.

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Our focus this week is on the other popular part of the Australian stock market which
has completely fallen away in recent years – mining and energy stocks. There has been
some recovery in stock prices over the past few weeks but in the context of one or two
years, valuations are still very depressed and for good reason.
Our note this week is simple. We tend to go into deep analysis when need but
occasionally in this publication, we summarise our points concisely. Over analysing can
often lead to losses. The simple reality is that commodity prices are still very
depressed, particularly the large key commodities. In Australia, the real commodities
that matter to the direction of the ASX 200 index are iron ore, coal, oil and to a small
extent gold. The later has performed above our expectations in recent weeks but not
enough to break the downward trend and sentiment among Australian resource
companies.

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Image: Copper futures contract, four hour price chart via Invast MT4 platform

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For mining stocks to break out of their downward long term trend, we need to see a
convincing move on the copper price. Why copper? Readers of this report will know
that we have a very high regard for the copper price as a lead indicator for all other
industrial commodities. We wrote about copper extensively in our 2014 and 2015
Outlook guides. The problem is that despite the huge money printing from Europe
and Japan coupled with the recovering US economy, the copper price remains very
depressed in the context of the past decade.

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Copper at US$2.60/lb as of the time of writing is at an extremely depressed level. It is
at a point where many global miners are not making a margin, yet alone an adequate
return on their investment. This is very important to consider when trading mining
shares in the current environment. There will be many mining companies that would
need to write down the carrying value of their copper assets. When the value of a
certain asset or market falls, companies need to readjust the value of their assets on
balance sheet. This means the balance sheet could potentially come under threat,
particularly if there is debt.

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We have a high degree of confidence that copper will turn a corner and eventually rise
into the US$3.30-65/lb price range, but this will take time and requires patience. If
you don’t have time, patience and discipline, don’t trade copper. The downside we
think is fairly capped, underpinned by natural demand and the margin cost of
production which we think is around US$3/lb on an all in cost basis. We could
potentially see copper lower than the current level, but probably not for an extended
period of time without sending many copper miners out of business.
The long term fundamentals for copper and other industrial metals is positive. We
wrote about India’s economic reforms in our 2015 Outlook Guide, in particular the
room for growth should Mohdi’s economic reform plan fall into place as planned. We
don’t plan to repeat much of that again, but the direct link to that report is here if you
would like to read our big picture view on copper.

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It’s not just copper either. Over the past few weeks we have been writing about the
impact of lower energy and iron ore prices on the valuation of major miners like BHP
Billiton. History has shown that when BHP remains depressed, so too does the rest of
the listing mining industry. There will be volatility and short term trading
opportunities in certain names, but no reasonable break of the downside trend that
we have seen now since the end of 2013.
Below is a list of the major resource stocks – the issues that we are looking for and the
key triggers which we think are required before the share price of each starts to
recover.

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BHP Billiton - BHP will reports its interim earnings numbers on 24 February. We don’t
think there will be too much surprise in the actual earnings number itself because
most mining companies disclose their quarterly production numbers to the market and
so the large number of analysts in the market can work out the impact of pricing and
costs on these numbers to deduce an earnings estimate.
We think the real surprise will be commentary
around the value of BHP’s assets on balance
sheet.
There will be a need to write down the carrying value of assets, further postpone large
capital expenditure and articulate to the market the overall strategy once non-core
assets are no longer part of the total group.

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Image: BHP weekly price chart via Invast DMA CFD platform

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We can’t see much positivity coming out of the result unless commodity prices – iron
ore, energy and copper break out of their current downward spiral in a meaningful
way over the next few weeks. We would be steering clear, waiting to review the
viability of the balance sheet and looking for management commentary as to where
and when they believe commodity prices will bottom and recover.
Bottom line - We would be looking to short BHP going into their result announcement
as the overall market moves towards the 6000 level where we find strong resistance.

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Rio Tinto - Rio’s biggest problem is its huge exposure to iron ore. When the iron ore
price is rising, this is a major benefit. But we are in a falling iron ore environment and it
doesn’t look like the iron ore price is about to turning above its current trading range
anytime soon.
Even if the iron ore price was to rally, there will
be a line of traders looking at taking profits on
Rio Tinto for it’s over exposure to this single
commodity.

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Image: RIO weekly price chart via Invast DMA CFD platform

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The iron ore market moves in long term cycles. The doubt around Chinese demand is
perhaps not as large as concerns around the increase in production from key global
producers. The excess supply will take time to filter through the market. This doesn’t
happen overnight, it can be a long and painful affair. For this reason we think Rio Tinto
will remain a lose/lose exposure.
When the iron ore price it won’t rally as much as peers and face questions around its
exposure to a single commodity and when prices remains depressed, it will have to
work hard to justify the value of its recent investment and growth plans across its
Australian mines.

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Bottom line - Investments into other asset classes and geographies have been
disastrous for shareholder with a huge amount of value destroyed over the past
decade. For this reason, we rate Rio Tinto an outright Avoid. Rio Tinto will report its
annual earnings on 12 February.

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Woodside Petroleum - Without a doubt, Woodside is the highest quality energy
exposure on the Australian market and probably even across the Asia Pacific region.
For this reason, we think there will always be
buying support at around the $35 per share
range.
Traders need to keep in mind that the current oil price fall is very large and savage in
the overall historical context. Woodside is managing to ride this downturn out and
have outperformed its listed peers for one very good reason – high quality assets and a
strong balance sheet.

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Image: WPL weekly price chart via Invast DMA CFD platform

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These two factors are often the key ingredients in long term successful companies.
Unlike BHP and Rio Tinto, Woodside will find many more contrarian buyers and is likely
to have less balance sheet implications during this commodities slump. The key risk is a
pro-longed period of low energy prices.

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We don’t think this is sustainable for the following reasons:
1) The huge money printing from Europe and Japan is likely to add global inflationary
pressure in the decade to come and fuel the economic activity in these energy hungry
economies.
2) The world’s largest consumer of oil – the United States – is undergoing a solid
economic recovery and demand for energy is unlikely to fall during this period.
3) Consumption of energy per capita in the developing world is still very low and rising.
The fundamentals behind higher energy prices haven’t changed, the current increase
in supply will eventually work through the market. The developing world issue is
medium term in nature and doesn’t appease short term supply issues.

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Woodside reports its interim results on 18 February. The market has a fairly good idea
around production numbers and realised prices. So we don’t expect much surprise
around the earnings number itself. Instead, the market is likely to focus on the strength
of the balance sheet and whether or not Woodside is using the current market
environment to make any opportunistic acquisitions.
Bottom line – Woodside is high quality and a solid long term business. It is likely to
find support from contrarian investors at around the $35 per share range. We would
be buying after the result at any price below this level. Let’s first see the numbers.

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Gold stocks - We would only consider Newcrest Mining, although our view on gold
from the 2015 Outlook guide has been that lower energy prices and a rising US dollar
could see the floor price move to around US$900 per ounce. This is highly contrarian
and has not eventuated so far this year.
We will continue to monitor the gold price
environment, doubting very much the ability to
add further gains. Gold to silver for example
touched a resistance level in January which we
also reported in the guide.

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Our preference is against gold BUT if traders and investors have an alternative view,
which we respect, our only pick among the major gold exposures in Australian would
be Newcrest Mining. Newcrest reports on 13 February.

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Which Shares to Buy? ASX Reporting Season Webinar
Invast Insights chief editor and contributing author Peter Esho will summarise his
outlook on Australian shares during February reporting season. Esho will document his
findings based on the performance of key stocks and where he believes the big
opportunities lie next year. His presentation will focus on the following 5 themes:

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Performance and outlook of the Australian banks
Performance of mining companies and which to avoid
His 6 key stock picks for 2015
Key performance result highlights
Esho is a regular contributor on CNBC, Bloomberg and host of ‘Your Money Your
Call’. His webinar will cover both the fundamental and technical outlook on these
key themes and a basic introduction to Invast’s new DMA CFD product offering
which complements MT4 and other services. This webinar is expected to fill fast.
Q&A will be open straight after the presentation. Register now by going to
www.invast.com.au/webinars.

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Go to www.invast.com.au/insights to get a
complimentary 4 week trial and receive the latest
insights as they are published to our live clients.

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Disclaimer
Please note that you are receiving this report complimentary from Invast Financial Services Pty Ltd
(AFSL 438 283). Invast staff members may from time to time purchase securities which are
included in this or future reports. The authors of this report may or may not be holding a position
in the securities mentioned. Please note that the information contained in this report and Invast's
website is of a general nature only, and does not take into account your personal circumstances,
financial situation or needs. You are strongly recommended to seek professional advice before
opening an account with us.
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person who downloaded it. You should not disseminate, distribute or copy this newsletter. Invast
does not accept liability for any errors or omissions in the contents of this newsletter which arise
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and should not be construed as a solicitation or offer to buy or sell any financial product. Invast
Financial Services Pty Ltd is regulated by ASIC (AFSL 438 283 | ABN 48 162 400 035).

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Risk Warning: It's important for you to read and consider the relevant Product Disclosure
Statement, and any other relevant Invast Financial Services Pty Ltd documents before you decide
whether or not to acquire any financial products listed in this email. Our Financial Services Guide
contains details of our fees and charges. All these documents are available here on our website, or
you can call us on +612 8036 7555. CFDs and Foreign Exchange are leveraged products and carry a
high level of risk and you can lose more than your initial deposit so you should ensure CFD and
Foreign Exchange trading meets your personal circumstances.
General Advice Warning: Being general advice, this newsletter does not take account of your
objectives, financial situation or needs. Before acting on this general advice you should therefore
consider the appropriateness of the advice having regard to your situation. We recommend you
obtain financial, legal and taxation advice before making any financial investment decision.

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