A falling A$ good for miners?
With the A$ having fallen consistently against the US$ we’re seeing a steady flow of commentary aimed at helping investors navigate the changing environment.
Unfortunately, not all of it is very helpful. One thesis that has appeared is that the falling A$ is good for resources companies, as their end product tends to be priced globally in US$. A constant US$ price and a falling A$ translates into increased A$ revenues and bingo – an immediate uplift to EPS.
This seems sensible, until you consider whether there is a relationship between the A$ and commodity prices. If one of the factors pushing the A$ down is a more pessimistic appraisal of demand for commodities, then it’s hard to conclude that a declining A$ is good news for resources companies.
The chart below shows the recent history of the A$ vs the US$, together with the US$ iron ore price.
We’ll leave it for you to decide whether the picture painted is a rosy one for resource companies.
Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Aditya Asawa
:
A good point, well made. I also scratch my head at the arguments around the falling A$ and why it is good for companies with revenues denominated in foreign currencies. I think the better way to look at underlying performance is on a constant currency basis. There is little point in 20% earnings growth if it was all driven by a devaluation in the home currency and the actual underlying business threw off no revenue growth. You might as well be currency trading rather than investing in a business.