Analysts Report and Recommendation of Equity of Company

Analysts Report and Recommendation of Equity of Company

Stage 1: Background analysis and choice of companies

In this report, mining industry (excluding gold or energy) is chosen to invest on the perspective of exchange-traded equity. Industry and macroeconomic investment context analysis are priorities which need to be conducted first, followed by the description of several chosen companies and finally the recommendation of a unique target company.

Industry Analysis

Mining industry is defined as extracting any of metals, minerals or hydrocarbons from the earth by any manner or method including exploration, prospecting, development and land clearing, preparatory work and rehabilitation during the life of the mine (Mining Industry award, 2012).

Growing global demand for mineral resources is fuelling the growth in the mining industry. In Australia, it has an abundance of mineral reserves. Mining industry has been one of core driver of its economic growth, which currently contributes approximately 14% of Australia's GDP (The Australian Mining Guide, 2011). Moreover, Australia is the one of top three producers in mining industry (Asia Pacific Cities Summit, 2011). In 2010, the mineral resource exports account for approximately 39.4% of merchandise exports (The Australian Mining Guide, 2011). In over five year, mining export earning are expected to reach $225 billion dollars and the export volume are forecast to increase for iron ores (62 percent), metallurgical coal (47 percent), thermal coal (65 percent), copper ores and concentrate (77 percent) and alumina (29 percent) (Bureau of resources and energy economics, March 2012).

Macroeconomic investment context

1. Supply and Demand

As the economy continues to recover, demand of minerals such as coal, copper and iron will continue to rise. Normally, mining companies would respond by increasing supply, but in practice they cannot because of regulation in mining industry (The top 10 issues mining companies will face in the coming year, 2011).

Rapidly increase in minerals demand will affect prices of commodities. At least prices will be steady or rising on everything from coal, copper and iron ore to gold, silver and rare earth metals. According to rising price of material, many countries are taking steps to reserve their own supply by reducing their export. For example, Russia reduced coal export and China cut back exports of rare earths (The top 10 issues mining companies will face in the coming year, 2011).

Moreover, world's major mining companies invested in Asian countries. For example, Vale, the word's largest iron company, invested in China. The Brazilian company is also beginning to invest in China (Supply and Demand: Asia's Mining Market at a Glance, 6 April 2011). This will affect supply and demand of minerals in world mining market and Australia's export income. Thus, the China will consume less minerals from Australia's mining industry. At the same time, China will increase their supply of mining products.

Hence, when demand and supply are not matching, these will rise uncertainly of investment perspective in the Australia mining industry.

2. Exchange rate

Australian dollar fluctuates against other foreign currencies such as $US, Euro, Pound and Yen. Export good become either cheaper or more expensive to international buyers. In recently, Australian dollar appreciates greatly against the $US dollar. Most of Australia's mineral exports are sold in $US dollar contract (Fraser, 1 April 1998). Thus, the export mineral product that they are purchasing becomes more expensive and they will incline to buy less of that product. This means less income to domestic Australia mining sector. On the other hand, as the Australia dollar falls against foreign $US dollar, the products will become more attractive to the foreign purchasers.

According to the $US and $AUD exchange rate, the Australian mineral export price is also influenced by fluctuations in the mining industry stock price (Price and exchange rate development, 2011). Thus, the uncertainty of exchange rate affects investment in mining industry.

Description of several selective companies

BHP Billiton

BHP Billiton is a leading global resources company in the world. It is the world's largest diversified resources and producers of major commodities, including aluminum, copper, energy