London calling, Australia answers

It was never about mining. It was, and remains, all about money – with the ‘it’ being the Western Australian resources sector during the boom years, and now during the bust.

Once the money factor is recognised as the market driver going up and coming down, the future becomes much easier to forecast; and after a week mixing with the moneymen of London, it’s pleasing to report that the future is looking much better than the past.

Money – by the truckload – is being marshaled by banks and private equity fund managers as the investment world gets ready for the fundamental change in markets that will follow the end of the US central bank’s artificial support of the American economy.

Signs of the new normal, which will replace the five-year recession that followed the 2008 financial crisis, can already be seen in economic data showing: the US economy steadily improving; China maintaining growth at 7.5 per cent, Britain expanding at a faster rate than Australia; Europe stabilising; and the emerging economies of Africa and Asia leading a surge in demand for manufactured goods.

It’s the steady increase in the purchasing manager index (PMI) of China and the US that is the key pointer to a recovery in commodity prices; and it’s the money sitting on the sidelines that will revive the WA resources sector once it starts to be deployed.

No-one in London was able to put a precise figure on the size of the cash pile looking for investment opportunities but they did consistently say there was a need to find something that yielded better than the 1 per cent being offered on bank deposits – a number that slips into the negative after allowing for inflation.

Best estimates from bankers attending the annual Mines and Money conference held last week in London put the available cash in the tens of billions of dollars, with Australia becoming a more attractive target by the week thanks to the sliding value of our currency.

This is the sequence of recent developments, and the likely scenario over the next 12 months.

• The crash of 2008 killed confidence in most forms of investment, with artificial government stimulus creating a fool’s paradise that ended in 2011 when governments woke to the problem they had inherited by taking on the debts of the private sector.

• Too much money in the global system distorted investment decisions and led to overbuilding by resource companies (too many mines and oilfield), a build-up of cash in the banking system, and spectacularly low interest rates for funds on deposit.

• An end of the building phase, best seen through the mothballing of BHP Billiton’s Olympic Dam copper and uranium mine in South Australia, has led to the start of cash being redirected to investors in the form of higher dividends.

• Cash is now spilling over the edge of the banking system and burning a hole in the pockets of investors, who are keenly seeking alternative investment opportunities.

• Australia’s high-priced dollar, high internal costs and reputation for poor management, has driven investors away from our markets in recent years, but as the dollar slides Australia returns to investor radar screens, hopefully to find that the mining sector is being repaired through mergers and the removal of bankrupt businesses.

• Over the top of this picture of multiple money flows there is the good news of rising PMI readings, which must trigger an increase in demand for the raw materials that WA produces – you can’t have rising levels of manufacturing without rising levels of commodity consumption.

• Private equity funds, such as the $US1 billion raised by X2, the return vehicle of former Xstrata boss Mick Davis, are searching for opportunities to re-enter the resources sector, hopefully by acquiring surplus assets off-loaded by big miners such as BHP Billiton and Rio Tinto.

• Once the dam breaks, and private equity funds lead the way back, other investors will follow; providing the capital to kick-start the depressed exploration and small mining sector.

If that sounds a little idealistic and premature then you need to see the situation through the eyes of investors in Europe and North America, who are becoming increasingly desperate for a higher return on their funds, which are shrinking alarmingly.

Resources, after two years in the sin bin, are very much back on the agenda; and while more repair work is required to clear away the failed stocks littering the bottom end of the Australian stock market, there is a steadily flow of inquiries by investors about Australian mining and oil stocks.

It’s not a return to the boom, but it is the end of the bust.

Safe bet

Another sign that fresh funds will start to find their way to WA’s mining sector in the New Year is the growing belief that other parts of the resources world are becoming less attractive.

Large parts of Africa remain a no-go zone for many investors, and South America is becoming less appealing as governments ratchet up their demands for a bigger slice of the resources pie – despite the pie so obviously being smaller than it was.

Chile, home to one-third of the world’s annual copper output, is on the verge of making the same mistake Australia did four years ago by ratcheting up taxes on mining – the corporate tax rate is poised to rise from 20 per cent to 25 per cent, and royalty rates tipped to increase.

With a presidential election in Chile likely to return Michelle Bachelet to power after a hiatus of three years, there is growing nervousness in the country’s mining sector that life is about to become much more expensive and that it might be time to start exploring elsewhere.

Dead cert

Dead but still working. That’s the bizarre world of modern entertainment, where the owners of an entertainer’s estate can continue reaping a reward as rich as the $US160 million that the late Michael Jackson generated though ‘hologram concerts’ that attract fans by the thousand every week.

Other dead-but-well-paid entertainers include Elvis Presley, who earned an estimate $US55 million this year despite dying in 1977, and Marilyn Monroe who generated fees of $US15 million, 51 years after she died.