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ICARUS EXCLUSIVE: Trade Play – ASX.S32 – South32 Ltd

Icarus Special Contributor Keyser Sze

Governments all over the world will be seeking to re-build the economic devastation that has occurred due to the lockdowns. How will they do that ? The same way they always have.

The only complicated algebraic calculation politicians know goes something like this. (Note I am sure sometimes PWC or KMPG gets commissioned to explain this to them, probably with a crayon or an etch a sketch)

J = PM(IP+BS+BH+SHB)

J = Jobs PM = Print MoneyIP = Infrastructure ProjectsBS = Build SchoolsSH = Build HospitalsSHB = Subsidise Home Building

We all know correlation, cause and effect, are hard words to understand, so I’m sure the above formula needs their BIG 4 Consulting firms to explain with a crayon or a etch a sketch. Which then gets simplified to this formula. 

J = V

J = JobsV = Votes

What do you need to get these votes? Lots and lots of resources. Herein lies our opportunity to offset the damn inflation that is coming, and cope with negative real risk-free rates (thanks a lot for that Mr Powell and Mr Lowe) . Gas and Oil are the two that spring to mind. But Gas has an over an oversupply issue, and oil has electric vehicle headwinds they want to stave off for as long as possible, plus the cartel want to see US Shale go to zero ASAP. So let’s skip those.

But what about aluminium, coal, magnesium, nickel? Could they replicate Iron Ores meteoric recent rise?

Aluminium Chart – Trading Economics

Coal Chart – Trading Economics

Manganese – Trading Economics

Nickel – Trading Economics

So how do you play it? South32 is how. It has strong exposure to all of these metals. I won’t go into all the revenue, income break downs, I can’t do everything for you, but here is an overview of how price changes in these metals will affect revenue. As per the ASX.S32 annual statement, 2019.

S32 Annual Statement – 2019

South 32 enables broad access to all of these metals, and you even get some silver thrown in for free. Who doesn’t think silver is going up ? Anyone ? Only thing to be aware of, is their exposure to USD/AUD, Most of the revenue is generated overseas (I wonder if I will ever be allowed to leave my home, let alone Australia ?!!??)…. You have been warned.

So entry point…

I’m waiting for a pullback to $2.08 – $2.12, unless I see unusual volume showing that the smart money has been tipped of on the annual results (as they always are). So perhaps, one might wait till results are released, but if your only living once like me, I’ll play if before then if it hits around $2.10. This is a suggested mid to long-term play, so buy as you see fit. Oh, and for those of you that follow volume like a hawk as I do, check out the spike on the 19th June after the close (seen on 5 min chart, below is hourly). Someone bet big.

S32 not really showing much conviction, until the last few days, but support looks strong at $2.04 and resistance at $2.20ish, where it’s sitting now. So, wait for that pullback if your patient enough. Should happen in the next few days. 

Past performance isn’t a predictor of future performance, “blah blah blah chart” (average 40% of previous highs)

General Fluff…

If you want to keep track on the broad trend in commodities, keep an eye on Bloombergs BCOM index. It constituents are fairly evenly weighted overview of the market. But keep in mind that coal, and magnesium are not in it. Click here to see the weightings and commodities included in 2020. Key below is the strong trend up since March lows AND that the index is sitting at all-time lows. Plenty more movement upwards I believe.

BCOM Long Term – Bloomberg Commodities Index

BCOM Short Term – Bloomberg Commodities Index

On a side note, if your looking for a resources exposure without the capital expenditure costs, ASX.IPL, Incitec Pivot Ltd (what a stupid name), might be for you. 13% rise in the last few days, and 40%ish of pre-covid highs. Sells explosives to miners, and fertilizers to farmers. We all need to eat, and miners love to blow stuff up. Whats not to like. 

Happy trading people. Remember, if it’s not enjoyable, you are not trading properly !! 

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