07/05/2013 - 14:38

Xstrata co-founder Davis lines up new tilt

07/05/2013 - 14:38

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Follow the man, follow the money. For hard-hit followers of resource stocks in Western Australia that’s where they will find nuggets of good news, as smart people with spare cash refocus on a mining sector that’s showing early signs of a sustained recovery.

Follow the man, follow the money. For hard-hit followers of resource stocks in Western Australia that’s where they will find nuggets of good news, as smart people with spare cash refocus on a mining sector that’s showing early signs of a sustained recovery.

One man in particular, Mick Davis, deserves close attention because he has an excellent track record of picking winners in the often-tricky turns of the commodity price cycle.

Back in 2002, Mr Davis teamed up with Ivan Glasenberg to create Xstrata, a business that rode the China-driven boom from a $500 million standing start to a $50 billion business, which has just disappeared inside the Glasenberg-controlled commodities dealer, Glencore.

The takeover of Xstrata by Glencore was supposed to be a friendly affair, but ended acrimoniously when Mr Davis and the Emir of Qatar forced Mr Glasenberg to pay more than he wanted to create a business that rivals Rio Tinto, Anglo American and BHP Billiton for the title of world’s biggest resource house.

Perhaps because of his role in pushing up the takeover price, or because there was only ever going to be room for one top dog in the merged Glencore/Xstrata, Mr Davis was pushed aside with a parting gift of an estimated $100 million in cash and shares.

That nest egg is the money to watch, and Mr Davis is the man, because according to a series of reports emanating from Europe he is using part of his payout to launch a mining investment fund with the aid of the world’s top investment bank, Goldman Sachs.

One explanation for his return to mining, the business he knows best, is precisely because of that – it is the business he knows best.

Another, and more interesting explanation, is that the resources sector has hit rock bottom (or is very close to it) and now’s the time to go bargain hunting, just as Messrs Davis and Glasenberg did in 2002.

It would be foolish to believe the lightning that ignited the resources boom back then will strike for a second time in the same place.

But it would be equally foolish to ignore the signs, which indicate a turn from the downward cycle that has dominated resources for the best part of three years.

Last week, for example, the copper price slumped to its lowest price for almost four years, selling for a fraction over $US3 a pound and appearing to he headed for the low point reached during the GFC of about $US1.30/lb – until bargain hunters moved in and boosted the price back to $US3.30/lb.

A combination of physical demand for copper and investment fund buying helped copper recover, just as stronger demand for the big bulk carriers that haul iron ore and coal from Australia to Asia hit a one-month high (thanks to stronger demand from ship chartering firms).

There are other factors indicating the approach of a cyclical bottom to the resources sector, including the investment yields available from some of the biggest and best mining companies.

BHP Billiton, for example, will return a dividend yield for someone buying today of 3.4 per cent, which is more than you will get on a short-term deposit with Westpac or any of the other big banks (with shares in BHP Billiton offering the potential for capital gain as well as income).

And it’s worth noting that BHP Billiton shares have risen by 8 per cent since dropping to a low of $32 on April 18.

Analysed in any number of ways, the investment cycle is turning. Australian banks have had a stellar run but have almost certainly peaked, while industrial and retail stocks are captives of the political and interest rate cycles.

Resources has been the sick sector and that’s the likes of Mr Davis are assembling the capital today in readiness for the recovery which might have just started; and if it hasn’t, then it might not be too far away.

Unfortunately for many small companies, the revival will probably be too slow and too late. If they have run out of cash their best hope is as acquisition targets for bargain hunters such as Mr Davis, who is likely to start in the same place he did with Xstrata in 2002 – looking for cheap coal and copper assets.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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