15/04/2010 - 00:00

China, Africa the pivotal investment plays

15/04/2010 - 00:00

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Belief that boom times are back is leading some investors to take a punt.

RISKY behaviour is something most people associate with driving too fast, or drinking too much, or both.

In business, risky behaviour is what happens when people invest their money without really knowing where it is going, or who is going to manage it – something Australians are doing with gusto today in the belief that the boom is back.

Examples of our willingness to accept higher levels of risk can be found across the business spectrum and include strong demand for investment properties even as interest rates rise, and allocating funds to companies with most of their assets in high-risk countries, such as China and parts of Africa.

The China example is interesting because while good money is to be made selling commodities to China, it is a different matter investing directly in that country – and then hoping that your local partners and government authorities will respect your rights, and capital.

Merging the Seven media network and the Westrac industrial equipment business is one example of how a business that was once pure Australia is taking on a high level of China risk; something that investors do not yet seem to be considering.

That will change after the merger because the new business will have a dominant single shareholder in Kerry Stokes, and its fastest growing division in China – but only while retaining a franchise to sell US-made Caterpillar industrial equipment.

Perhaps Bystander is being overly cautious, but taking on the risk of investing directly in China is one step into the unknown, doing it in a business dependent on a US-issued franchise at a time there is talk of a US-China trade war is another – sort of risk layered on risk, and that’s before considering your investment in the new Seven group is controlled by one man.

If punting on Seven is not your idea of risk then let’s go back to West Africa, a topic raised last week, and consider two interesting events – a mini-boom on the stock market, and rising royalty rates for mining companies.

The royalty question first, because that is the issue the Australian boss of AngloGold Ashanti, Mark Cutifani, singled out as a reason for his claim that sovereign risk was higher here than in South Africa – a view he might reconsider after the murder of the far-right politician, Eugene Terre’Blanche.

If another murder, one of 50 in South Africa last week, doesn’t do it for Mr Cutifani, then the fact that Ghana has just lifted its goldmining royalty from 3 per cent to 5 per cent might swing the day. And if that’s not convincing, then a curious government crackdown based on allegations of environmental problems at foreign-owned mines might be enough.

The point is that risk in Africa is not so much rising, as remaining at the highest level in the world, something Australian investors are ignoring as they pour more money into a string of stocks, especially gold explorers, active on the continent.

Good money will be made in many of the African adventures, just don’t fall in love with your favourite, and only buy the most liquid assets to ensure an exit route is open because conditions can change very quickly.

Rinehart in the money

WHILE foreign adventures interest some investors and business owners, there is one person Bystander reckons will always keep her money in Australia because it is delivering such spectacular returns.

Gina Rinehart, who was reported to have suffered a half-billion dollar loss when a Supreme Court judge ruled against her in a dispute over the Rhodes Ridge iron ore deposit, can comfort herself with an extra $100 million in cash each year courtesy of higher iron ore prices.

In what boils down to a case of a bird in the hand being worth two in the bush, Ms Rinehart doesn’t have to do a thing to get the extra cash because that’s her share from owning half of the famous ‘Hanwright’ royalty paid by Rio Tinto on ore mined by its Hamersley Iron subsidiary. The other half goes to Michael Wright and Angela Bennett.

The numbers work like this. In 2009, the year of the global financial crisis and disturbed markets, Hamersley generated revenue from iron ore sales totalling $US8.8 billion, about $US2.2 billion less than 2008.

This year, thanks to the reported 100 per cent rise in the price of iron ore, Hamersley’s revenue should soar back to around $US17 billion – with 2.5 per cent, or $US425 million, flowing into the Hanwright royalty – half to Rinehart and half to Bennett/Wright.

Supplementing the royalty flow will be Ms Rinehart’s increased profits earned at the Hope Downs mine she shares with Rio Tinto.

In total, Ms Rinehart’s cash flow from the royalty and iron ore production should hit $750 million this year which, in theory, lifts the value of her fortune to around $7.5 billion should she choose to sell at a 10-times multiple of earnings – making her a clear winner in the annual competition to find Australia’s richest person.

Time is now for BHP

GETTING the Seven/Westrac merger over the line, which seems to have happened this week, was a demonstration of deal making at its best, with Kerry Stokes giving a little ground in order to achieve a greater goal.

Watching from the sidelines, and hoping it can find a similar way forward, is BHP Billiton, which is struggling to cement its proposed merger of its iron ore division with that of Rio Tinto.

Bystander has long argued that the deal was ill-conceived in the hot-house conditions of the GFC, and that European, Chinese and domestic Australian pressure groups would ensure its derailment.

Seven/Westrac is an example of what has to be done to get across the line, with the question being what will BHP Billiton give up to land control of the Pilbara iron ore industry? Perhaps a couple of mines to demonstrate an interest in keeping the market open, or finally allowing third party access to its rail and port systems.

If BHP Billiton does not make such an offer, soon, it can wave goodbye to Rio Tinto’s assets, again.

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“Time is a great teacher, but unfortunately it kills all its pupils.”

Hector Berlioz

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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