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COLUMN-Small Australian miners are the canaries of commodity prices: Russell

(The opinions expressed here are those of the author, a columnist for Reuters.)

LAUNCESTON, Australia, Aug 4 (Reuters) - Are the strong gains this year in small Australian resource companies a harbinger of sustainable rallies for both bigger miners and commodity prices in general? Past evidence suggests yes.

The Australian Stock Exchange (ASX) Small Resources Index has jumped 66 percent so far this year, comfortably ahead of both large mining stocks like Rio Tinto, which has gained 10.5 percent, and a broad commodity price indicator, such as the Bloomberg Commodity Index, up 8.6 percent.

What this tells you is that small-capitalisation resource stocks have been the outperformer, but if you believe history is a guide then it is worth noting that the minnows have in the past rallied and peaked prior to major companies and overall commodity prices.

The ASX Small Resources Index gained 210 percent between its post-2008 recession trough in November 2008 to its peak on Jan. 19, 2011.

In contrast, the Bloomberg Commodity Index started its post-2008 rally later, in March 2009, and rose 72 percent to its later peak in late April 2011.

Rio Tinto did surge more than the small-cap index, jumping 251 percent in Sydney between its post-global recession low in early December 2008 and its peak in February 2011. But, similar to the broader commodity price index, the world’s second-largest mining company started its run later than the small-cap index and ended the rally later.

On the downside, the Small Resources Index also started losing ground earlier and tended to give up a greater percentage of its gains.

It dropped 83 percent from the January 2011 high to its recent low on Sept. 29 last year, while the Bloomberg index shed 58 percent between April 2011 and January this year and Rio Tinto gave up 58 percent from its February 2011 peak to its recent low in early February this year.

Since the recent lows, once again its the Small Resources Index that turned upwards first and has risen the most, gaining 80 percent from its trough in late September to its close on Wednesday.

The Bloomberg index has gained 15 percent from its recent low to Wednesday’s close, while Rio Tinto is up 33 percent.

The numbers tell a clear story, the Small Resources Index rallies and stumbles before a bigger company like Rio Tinto and wider commodity prices, and it tends to rise and fall by greater percentages.

SMALL CAPS TO CONTINUE RALLY?

The key question then becomes whether the Small Resources Index is likely to continue its rally, or whether a surge of 83 percent in the past 10 months means it has already done its dash.

To help answer that question it’s worth looking at the constituents of the Small Resources Index.

The top four companies, which account for about one-third of the index weighting, all have one thing in common, they mine gold.

The top-ranked company is Evolution Mining, which owns and operates seven gold mines across Australia.

Number two is Regis Resources, a Perth-based company that owns an operating gold mine and has exploration projects.

The third-biggest index member is OZ Minerals, which operates a copper-gold mine in its home state of South Australia and has a copper gold project under development.

And the fourth-biggest company is Independence Group NL , which has a stake in an operating gold mine, and shares in nickel and copper mines as well as several projects under development.

Given the reliance on gold in the Small Resources Index, it’s worth looking at how the index compares to spot gold , and here again it peaked before gold in 2011 and bottomed prior in late 2015.

While gold has enjoyed a 28 percent rally this year, there is the likelihood that this will extend given the current uncertain outlook about the global economy and the future path of U.S. interest rates, as well as political concerns over the possibility of Donald Trump winning the U.S. presidency and the ongoing fallout from Britain’s vote to leave the European Union.

The positive outlook for gold alone is enough to mount a case that the ASX’s Small Resources Index could extend its gains, which in turn should be positive for large cap miners and overall commodity prices.

History suggests that Australia’s mining minnows are like the canaries in the coal mine for broader commodity markets, chirping enthusiastically when prices are rising but dying off faster when the market turns.

Editing by Christian Schmollinger

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