03/10/2006 - 22:00

How to identify a market peak

03/10/2006 - 22:00

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How to identify a market peak

Looking for the peak is Australia’s newest national investment sport, whether it’s peak oil, peak nickel, or the peak of the stock market. Briefcase, in keeping with the spirit, spotted a few tell-tales in the “good news, bad news” category which might (or might not) be pointing to a market peak.

As is traditional, let’s get the bad news out of the way first, starting with a curious prediction overheard at a Gold Coast mining seminar last week, in which a prominent investment adviser was telling all within earshot that gold was “heading into the thousands”.

The “thousands” being referred to by Fat Prophets founder and resident guru, Angus Geddes, was thousands of dollars an ounce, a view based on a belief that the US dollar is heading for a big correction as that country’s economy buckles under the weight of trade and budget deficits.

Briefcase has no reason to doubt Geddes’ sincerity in tipping a tripling (and more) of the gold price, and he might even be proven right, one day because the US economy is a mess.

However, the last time someone stuck their neck out as far as suggesting a gold price in the thousands was around 1982, when the famous Aden Sisters, and the legendary Woody Brock, made similar predictions, based on the lack of mine production to satisfy gold demand, and an assumption that central banks would always be buyers of gold.

They were wrong.

Gold did precisely the opposite, and while there is no doubt that Asian buyers love gold, and that the Chinese central bank might be a buyer, it is an ominous sign when the tipsters start rattling out forecasts which can only be described as extreme optimism – perhaps a bit like the paradigm shifts we all enjoyed (not) in the tech boom of the 1990s.

Tell-tale two was contained in the annual report of the little-heard-of Orchid Capital, a company which once hit the headlines for a gold exploration theory which covered a large part of Tibet.

According to the grand vision of Orchid and its advisers, Tibet was the last frontier for minerals, and a bonanza in waiting.

It wasn’t.

After a few frustrating years, Orchid withdrew from Tibet, and has now withdrawn from mining. The new frontier for the company is the world of Asian-focused pharmaceuticals and renewable energy.

Briefcase has no reason to doubt the sincerity of Orchid’s new direction, but the last time it saw a company make such a dramatic change of direction was when West Perth mineral explorers suddenly became investors in South Perth home units sometime in the mid-70s – just as the mining boom of that decade peaked.

The third example of a peak in sight is very much of the tongue-in-cheek variety. Last week, Briefcase spotted a ‘situations vacant’ advertisement in the Australian Financial Review newspaper for mining journalists.

Given that the esteemed AFR missed the first three years of the boom, it is a bit of a worry that it now appears to have discovered it – perhaps a media version of using taxi drivers and bell hops (whatever they are) for share tips.

Now for the better news. It was at the same mining conference where Geddes gave his gold-price tip that Briefcase noted another genuine blast from the past which has slipped by all the youngsters in the media.

Jubilee Mines, a company best known for its high-grade Cosmos, Prospero and Tapinos nickel projects, slipped into its presentation a bit of fresh news about a project with the ambiguous name of Anomaly 1.

Mention of the new resource came at the tail end of an upbeat presentation by the company’s head of exploration, Peter Langworthy, a late replacement for the more outgoing boss of Jubilee, Kerry Harmanis, who presumably had an appointment somewhere close to the Melbourne Cricket Ground.

For most listeners to Langworthy Anomaly 1 meant little, even though it contains an eye-catching 53 million tonnes of material assaying 0.62% nickel for a whopping 328,000 tonnes of nickel metal.

Within that blob of low-grade material is a higher-grade core of 12.6m/t at 0.95% nickel. But whichever way it was explained, it struck Briefcase that Anomaly 1 was seen as a discovery unworthy of Jubilee, which has made its name as a miner of much richer orebodies.

What caught some ears, however, was the remarkable similarity between this first resource estimate for Anomaly 1 with what the old Australian Consolidated Minerals reported at Mt Keith more than 30 years ago.

Way back then, Mt Keith was also treated as a low-grade problem, rather than a bulk-mining opportunity. ACM, like Jubilee, was more interested in the higher-grade core, rather than the development of a monster mine processing millions of tonnes of ore.

WMC was much more interested in Mt Keith, which is why it formed a joint venture with Normandy Mining to acquire ACM. The two raiders then split the spoils with Normandy getting the Golden Grove base metals (and gold) mine, and WMC taking Mt Keith, which is now the flagship of BHP Billiton’s nickel division.

Not for one minute is Briefcase suggesting that Anomaly 1 is another Mt Keith. But, it is in the right location, it needs more drilling, and it joins a list of other big “disseminated sulphide” orebodies, such as Yakabindie and Honeymoon Well, which are waiting their turn for development and/or the successful proving of a hydrometallurgical mineral  processing route, such as LionOre’s Activox technology.

The message from Langworthy can be interpreted along the lines of Anomaly 1 being a distant development opportunity, or an asset ready for sale to someone interested in the trouble and expense of building a big open cut mine.

However, it is also an example of how the “missing link” in the boom, a feature called discovery, is starting to play a role in the boom – and that’s an extremely significant development.

“If you’ve heard this story before, don’t stop me, because I’d like to hear it again.” Groucho Marx.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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