|Summary: The positive view on Australian mining from Hong Kong and why our dollar might keep on rising as minerals and energy exports take off.|
|Key take-out: Asian investors do not subscribe to the theory that China is about to suffer a debilitating slowdown. From the edge of China, Australia’s minerals outlook is as bright as ever.|
|Key beneficiaries: General investors. Category: Commodities.|
You did not need to be in Hong Kong over the past week, as I have been, to sense that Australia’s slide as an investment destination has ended and that the country’s reputation is recovering. The evidence is in front of everybody in the form of the rising exchange rate.
For Australian miners who made the trip north to the annual Mines and Money conference in this sliver of greater China, the rising dollar was annoying – almost as annoying as the falling gold price.
Like many others with an interest in currency movements the miners had been hoping for a fresh fall in the Australian currency to boost their income when converting US dollars earned from mineral sales, and that international investors would be encouraged back to the Australian stockmarket.
The currency market, it seems, is ahead of the miners, and most sideline observers who have become too focused on the end of the construction phase of the mining boom have missed the fact that the production phase is doing wonders for Australia’s terms of trade.
Over the past few months Australia has converted a chronic balance of trade deficit into a largely overlooked balance of trade surplus; the first time this has happened for more than two years.
Ready to cash in
There’s a lot more to come as the twin forces of declining equipment imports, which were needed during the process of developing new mines, meets rising exports as mines crank up shipments and cash flows in rather than out.
Within the next few years the cash inflow from commodity exports will become a torrent as six new liquefied natural gas (LNG) projects are switched on: three in Queensland, two in Western Australia and one in the Northern Territory.
One effect of the LNG exports, which will catapult Australia into the position of world’s biggest supplier of LNG, will be to see the local currency behave more like a “petro-dollar”. Its movement will be dominated by the price of oil because LNG is priced as a form of petroleum.
LNG, in time, will challenge Australia’s current export leaders, iron ore and coal, and while it is fashionable to see both of those commodities as facing tougher times it is important to see the difference between a genuine crisis and a fall in profits.
While coal is in trouble Australia’s iron ore sector, one of the top topics at the Mines and Money conference, is not facing anything remotely like a crisis.
Some of the smaller and higher-cost mines will suffer if the price dips below $US100 a tonne, but at that level the bulk of Australia’s iron ore exports (those from BHP Billiton and Rio Tinto) will still be working on a profit margin of more than 100% – an astonishing rate of return that other industries can only dream about.
It is the mix of high-grade ores with phenomenally efficient mining and transport systems that enables the two leading producers to churn out hundreds of millions of tonnes of iron ore a year at $US47/t.
International investors who look beyond alarming headlines such as this one: “Australia’s luck runs out as China slows down”, in Wednesday’s Financial Times newspaper can see the evidence of the Australian currency having already incurred its correction, with the fall from $US1.05 at this time last year to US90 cents last week before a surprise bounce to US92c.
The same investors, many from mainland China and other Asian trading nations such as Japan, Taiwan, and Korea, do not subscribe to the theory that China is about to suffer a debilitating slowdown. A correction, yes, but a sustained slowdown, no, largely because the Chinese government cannot tolerate the idea of the social upheaval that would follow a major economic hiccup.
That’s why people such as Anna Mao, a very well connected Beijing-based businesswomen made the trip to Mines and Money, partly in her capacity as chairman of small ASX-listed uranium explorer Enterprise Uranium (code ENU), and partly to look for fresh investment opportunities.
Ms Mao, who has taken out Canadian citizenship, is one of the new breed of internationally focused Chinese entrepreneurs who recognise Australia for what it is: a highly efficient supplier of raw materials for Asian manufacturers, as well as being a country with solid government and strong laws.
People in Australia sometimes do not see their own country in the same way as Ms Mao and others like her, being quicker to identify with the mistakes made during the first construction phase of a commodities boom that hasn’t really gone away but is simply taking a breather.
It is from conferences such as Hong Kong Mines and Money that the effects of the changes made in the Australian resources sector over the past 12-to-18 months can be more clearly seen, especially the scaling back of some new projects and the drastic trimming of internal costs.
BHP Billiton’s mothballing of its Olympic Dam copper and uranium mine almost two years ago sent a powerful message to the metals market that return on invested capital would determine which projects were developed in future rather than any project that appealed to management.
Noble Group, one of Hong Kong’s great success stories in the commodity trading sector, is doing the same thing as Ms Mao in looking for new ways to invest in the next wave of Australian resource development. It has taken equity positions in a string of ASX-listed stocks, including Cockatoo Coal, Sundance Resources, Aspire Mining and X2, the comeback corporate vehicle of former Xstrata boss Mick Davis.
Australia’s big miners did not put in an appearance at Mines and Money, partly because they don’t need to and partly because they regard it as too much of a trade fair.
For the estimated 75 small Australian mining companies who sent representatives to the conference the event produced mixed results, thanks to the event coinciding with a sharp fall in the gold price, concern about China’s growth rate, and the unexpected rise in the value of the Australian dollar.
While the gold explorers struggled to peddle their stories it was a different matter for anyone talking about the hot commodity in the minor metal space, graphite. Talga Resources appeared to trigger an immediate investor response after its chief executive, Mark Thompson, delivered an upbeat presentation on the company’s graphite assets in northern Sweden.
From a closing price last Friday of 14.5 cents, Talga shot up to 20.5c immediately after Thompson told about 200 investors at his presentation that a new way had been found to extract graphene (a new material extracted from graphite with extensive applications in a number of technologies) from Talga’s high-grade ore bodies.
Talga was the small-stock success story at Mines and Money but the event did clarify the view of Australia held by international investors, a view best seen in the dollar and an assessment that the excesses of the boom years are being washed away and the groundwork laid for a fresh burst of growth.
The test of that theory lies in the way the Australian dollar is seen by some currency traders as a proxy for the economic performance of China or, as it was put during the conference: “if you want to hedge a China focused investment portfolio the best avenue is to short sell the Australian dollar”.
That was undoubtedly good advice a year ago when China was showing first signs of catching a mild economic cold, and the Australian dollar was at a multi-year high. It is less attractive advice today because:
- China shows signs of applying a fresh dose of stimulus to its slowing economy.
- Australia’s terms of trade continue to improve with rising volumes of exports (and not bad prices) and,
- A future LNG export boom promises to turn the Australian dollar into the world’s new petro-currency just as a fresh wave of grave uncertainties wash over the global trade in oil and gas, courtesy of troubles in Ukraine.
The Australian success formula is one that many people at home might not see clearly because they’re too close to the action. But from the edge of China it makes Australia look as attractive as ever.