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What this $US1.5b mine expansion will mean for BHP and Rio Tinto

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Vale, the world's largest producer of iron ore pellets and nickel, has approved the $US1.5 billion Serra Sul 120 project in Brazil.

Some may remember in January 2019 that Vale had a disastrous dam failure that halted their operations in Brazil, which resulted in Australian mining stock prices rising strongly. From January to July 2019, BHP rose more than 20% while Rio Tinto increased by 30% and FMG by a whopping 128%.

The share prices of Rio Tinto, which announced the resignation of its CEO Jean-Sebastien Jacques and two senior executives today, and BHP peaked in July of 2019 before falling away with the miners still trading below their highs right now. Fortesque (FMG), on the other hand, benefited from the Vale mine shutting down, as it is still up more than 80% on its July 2019 levels.

While Vale expects the project to commence in the first half of 2022, I don't believe this will be a positive move for Australian miners, especially Fortesque.

While Brazil has been hit hard with COVID-19 infections, which is slowing down Vale's attempts to get the Serra Sul 120 project up and running, the big issue facing Australian miners right now is our strained relationship with China.

Currently, Australia delivers roughly 60% of the total iron ore imports to China, which puts BHP, RIO and FMG heavily at risk if this changes.

Despite the COVID-19 pandemic, exports in iron ore to China have increased by around 8%, which is good news given that China has imposed bans on beef and tariffs on our barley, not to mention the investigation into wine that caused Treasury Wines to fall heavily.

Australia is a significant player in the world when it comes to metals, so while China is not targeting our iron ore like other commodities, we do need to be prepared, as I believe Fortesque is most at risk given that it supplies lower grade iron ore.

That said, when the world moves into recovery mode from the COVID-19 recession, materials are likely to create the next boom, as nations focus on infrastructure to stimulate their economies. Given this, I believe we will see a switching of the guard from the tech bubble to commodities in the not too distant future and Australia is well placed to profit from this.

Best and worst performing sectors this week

Interestingly, Materials is the best sector so far, up more than 2% followed by Healthcare and Communication Services, which, as of writing, are both just in the green. The worst performers include Energy down more than 4% while Industrials is down more than 2% and Consumer Discretionary is down almost 2% so far this week.

Looking at the ASX top 100 stocks, the best performers include Adbri, which is up more than 6%, Rio Tinto up more than 5%, while Evolution Mining and Virgin Money are both up more than 4% so far.

The worst performers include Origin Energy down more than 9%, Sydney Airport down more than 6% while IOOF, Atlas Arteria, JB Hi-Fi and SEEK are all down more than 5% so far.

What's next for the Australian share market

It seems that my weekly report is like a record stuck on repeat given that the Australian stock market continues to trade sideways, as it rises some days before falling away.

That said, it is starting to decide on a direction, which looks to be down as I have communicated in recent weeks, given that over the last 12 trading days the market has fallen around 4%.

Despite the All Ordinaries Index closing higher than it opened 50% of the time in the last 12 trading days, the down days were larger, which indicates weakness in our market.

If the down move continues, the All Ordinaries Index will fall to below 5800 points and possibly as low 5400 points, although it could go lower. For now, I recommend that investors continue to be cautious and be prepared to exit if the fall is larger and quicker than I anticipate.

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Dale Gillham is chief analyst for Wealth Within (AFSL 226347). He has an Advanced Diploma and Diploma of Share Trading and Investment and more than 25 years' experience in the financial services industry.
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