21/06/2005 - 22:00

Tim Treadgold: Briefcase - Value in resources super-cycle

21/06/2005 - 22:00

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Finding value in a market where property has peaked and interest rates might creep a little higher is a dilemma for all investors.

Finding value in a market where property has peaked and interest rates might creep a little higher is a dilemma for all investors. Briefcase, as a free public service, suggests that the place to look is the resources sector, where there are at least two avenues to wealth.

The first is to back the sector itself, especially companies in production, because evidence continues to mount that the world really is in a super-cycle of rising metal and mineral prices.

The second is to organise a conference talking about the resources sector.

On the serious side, Briefcase had cause to chat with a few well-connected players in the equities market over the past week. These serious chaps are as far removed from the speculative end of the resources sector as Fremantle is from winning the premiership this year.

Their view of the market is that resources today are like banks and retailers of 10 years ago. Back in the mid-1990s stocks like Westpac and Woolworths posted solid share price gains as they recovered from a period of lacklustre trading. Much of the rise back then was seen as recovery at work.

But after the recovery a strange thing happened. The banks and the retailers kept on rising - for a decade, until those two sectors dominated investor portfolios. The reason for the long second wind can be explained with one word - earnings.

What happened is that the recovery phase delivered a short, sharp, boost to share prices. After that, the market realised that the game was still being played because rising earnings, coupled with falling interest rates, changed the investment climate. Consumers went on a spending (and borrowing) spree and investors profited.

There are obvious differences between banks, retailers and miners but the trajectory of the sectors on the stock market looks to be the same. First came the recovery phase, what some people call the boom of the past two years. Now comes the earnings phase as investors slowly realise that metal prices have not fallen and companies are enjoying a bumper profit season.

Other factors are at work, and very much in Australia’s favour. China remains the flavour of the month with an economy that shows no sign of slowing, while South America and Africa, the two great raw materials rivals to Australia, are showing every sign of distress.

No-one needs to have Africa explained. South America is different because it has, until now, been seen as a good news story of rising wealth and economic expansion. Look again, in recent months:

• Venezuela has started to implode under fresh form of socialist dictatorship;

• In Peru, BHP Billiton’s big Tintaya copper mine has been shut because of rioting by the locals;

• In Chile, the government has sharply increased royalty payments, industrial unrest is rising and BHP Billiton’s Cerro Colorado copper mine has been disrupted by an earthquake;

• In Bolivia, business has slowed to a crawl because of anarchy in the streets of the main city, La Paz.

The message to mineral buyers, especially those desperate to secure long-term supplies, is that dodgy parts of the world remain, well, dodgy. Australia, Canada and the US are the preferred locations to mine, and the preferred partners in new mine development.

The result is a sort of double-whammy effect. New investment dollars are likely to flow disproportionately to Australia, and earnings are likely to be boosted by buyers preferring to source their supplies from Australia.

What was it someone said about riding on a sheep’s back - better switch that to riding in a Haulpak.

•••

AH, but what about the second route to fortune, the conference circuit.

Briefcase, tongue firmly in cheek, noticed the little squabble between the organisers of the annual Diggers and Dealers bash in Kalgoorlie and what appears to be a rival event being held in Perth a few days earlier.

Both sides say there is no dispute, which is interesting because a casual outside observer might reasonably interpret the situation that way.

Diggers, after all, is an institution, albeit a difficult and expensive one. The annual pilgrimage to Kalgoorlie is seen as some form of rite of passage for mining types, not unlike the harsh treatment dispensed to new boys (and girls) at Duntroon, or some exclusive private schools.

The new rival, organised by the Association of Mining and Exploration Companies, promises to be a softer, gentler event.

Whatever the target market there is no escaping the fact that the two-day AMEC event starts on July 27, and Diggers kicks off seven business days later on August 8 - and a number of the speakers appear at both events, including Consolidated Minerals, LionOre, Mincor and Troy Resources.

Briefcase reckons that the chances of those four companies saying anything different between AMEC and Diggers is about the same as, well, Fremantle winning the premiership this year.

But, having pointed out the obvious and dismissed the explanations of there being no competition (pull the other one), how about a squiz at the cash-flow or, as Deep Throat told the Watergate duo, “follow the money”.

To attend the AMEC event, and spend two days listening to some astonishingly bizarre talks for a mining event, such as Gabrielle Morrisey’s talk on “Sex over Lunch”, you can buy a gold package (the full two days) for $1,320, or silver for $902 (one day). Discounts for early registration apply - but the fact that potential delegates are being asked to lash out the best part of $1,000 to attend a one-day gabfest highlights the point that this is a business venture as much as a conference.

It’s the same with Diggers, where a delegate pays $1,210, and then pays for motel accommodation, and a huge air fare, or car hire to get to Kalgoorlie, or takes a chance on the notoriously unreliable train service.

The game of making money from mining conferences is becoming so transparent, and the ability of speakers to actually say anything new and not breach stock exchange listing rules so restricted, that Briefcase wonders whether the conference circuit has peaked, like the property market.


“The average man’s opinions are much less foolish than they would be if he thought for himself.” Bertrand Russell

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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