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High return, high risk for mineral stocks in S'pore

Mineral stocks in Singapore as a whole have underperformed the market in the first half of this year. However, market-watchers said there is upside potential in the resources sector when factored into a diversified portfolio. Still, they warn that with higher returns, come higher risks.

SINGAPORE: Mineral stocks in Singapore as a whole have underperformed the market in the first half of this year.

However, market-watchers said there is upside potential in the resources sector when factored into a diversified portfolio.

Mineral stocks make up a total market capitalisation of some S$1.8 billion on the Singapore Exchange. The 12 counters averaged a total return of about 2.3 per cent in the first half of this year -- underperforming the STI, which climbed by 3.5 per cent year-to-date.

Market experts said the performance of each counter varies substantially depending on the underlying business.

Geoff Howie, director of market strategy at the Singapore Exchange, said: "Performances were very mixed for those 12 mining stocks listed on SGX.

"There are two main reasons for this. First and foremost, of the 12 mining stocks, eight of those stocks have other substantial businesses outside of their mining activities.

"Secondly the 12 mining stocks are mining for very different commodities. For instance, we're looking at iron ore, gold, thermal coal, tin, vanadium, phosphate, as well as gypsum."

SGX recently reviewed its rules to attract listings from mineral, oil and gas companies.

The latest to show interest are two mineral firms -- Alliance Mineral Assets and Terratech -- who have filed preliminary offer documents to list on the Catalist board.

SGX said the move is helping to boost market liquidity.

For the 12 mineral counters, the value of shares traded over the past 12 months averaged around 150 per cent of their market capitalisation -- that is higher than the overall average of 39 per cent on the SGX.

Analysts said there is upside potential for stocks in this sector as part of a diversified portfolio. But they note -- with higher returns, come higher risks.

The average annualised volatility levels of the 12 stocks averaged 70 per cent over the past six months.

Ng Kian Teck, lead analyst at Voyage Research, said: "For Singapore, we've already built a very good base especially along the REITs side, which is very defensive in nature. To promote the minerals sector is to add colour to the retail investor's portfolio. Such companies actually help investors to generate the kind of returns required.

"Of the 12 companies, most of them are small cap in nature -- so in general, they already have high volatility. In addition to that, for this sector there are a lot of geopolitical risks. The share price can be affected by government policies on resources, the movement of mineral price and other reasons such as economic activities.

"Because of the many factors affecting the share price, generally the volatility will be a lot higher as well."

Currently, there are a total of 21 counters listed on the SGX from both the mineral and oil & gas segments -- that is compared to just seven in 2010. 

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