Message 19426956
Golden Opportunities
feer.com
Australia's mining stocks--from nickel to copper to gold--are soaring thanks to Chinese demand for
commodities that fuel its manufacturing and building boom
--------------------------------------------------------------------------------
By Jan McCallum/MELBOURNE
Issue cover-dated October 30, 2003
--------------------------------------------------------------------------------
AFTER YEARS OF being out of favour, Australian miners are once again riding high on booming metal and
stock prices. Commodity prices are at their highest in several years, fuelled by strong demand from China and
the recovery in Western economies. Nickel has risen 50% this year to a 13-year high, copper is at a six-year
high and gold at a seven-year high.
Prices have risen so fast that some commodity analysts believe a technical correction is possible, giving
markets time to take a breath and reassess valuations. However, they believe prices will then continue
upwards, propelled by fears of supply shortages caused by several years of depression when mines were
mothballed and exploration budgets cut.
The Canberra-based Australian Bureau of Agricultural and Resource Economics, or ABARE, forecasts demand
growth this year of around 4% for metals such as nickel, copper, zinc and aluminium, hardly huge enough to
justify the recent months' boom in commodity prices. "The real difference is on the supply side," explains
Andrew Maurer, ABARE's principal economist of minerals-and-energy commodity forecasting. He says the
nickel price in particular has risen because stockpiles are low. "While there is new capacity in the pipeline,
nothing of significance is expected until 2005 so we are relying on existing producers being able to produce as
much as they can. Any supplier disruption will have a big impact, so prices will be quite volatile over the next
year or so."
Nickel is trading around $5 a pound but with depressed prices of $2.20-2.50 for the past few years there has
been no incentive to explore or develop new mines, according to Ray Chantry, the head of resource research
for the Melbourne stockbroker E.L. and C. Baillieu. He says it typically takes 10 years from finding a new deposit
to bringing it into production, so it is hard to see a downside in nickel prices.
Much of the increased demand is coming from China, which is sucking in resources for construction and
manufacturing. While China is the world's largest producer of stainless steel, it has no domestic supply of
nickel, which is needed in the manufacturing process.
The boom has led to a rush of mining companies applying to list on the Australian Stock Exchange, with all the
producers benefiting from higher demand for metals. Melbourne-based gold-miner Newcrest Mining saw its
stock more than doubling in 12 months to A$12.10 ($8.39), as did other gold miners' stocks, while
Melbourne-based BHP Steel, the largest steel company in Australia and New Zealand, is up 64% to A$2.40 in
the year to October. Meanwhile, Melbourne-based WMC Resources, Australia's largest nickel miner, has been
out of favour because of operational problems with its Olympic Dam copper-and-uranium mine in South
Australia. When the stock was trading at A$3.70 in June, most of Australia's analysts rated it a hold or a sell and
it fell to a low of A$3.26. It is now around A$5.31.
BHP Billiton and Rio Tinto, both based in Melbourne and among the world's largest copper producers, are also
benefiting from the boom. BHP is up 50% over 12 months in the year to October to A$12.28 and Rio is up 30%
to A$36.59. However, it is the smaller producers and explorers that have provided the most spectacular gains.
Perth-based Jubilee Mines has risen 50% since August on the increase in the nickel price and prospects for its
Cosmos Nickel Project in Western Australia. Independence Gold has risen from 27 Australian cents to A$1.49
in the year to October after buying up nickel deposits in Western Australia. Similarly, Western Areas, also in
Western Australia, has gone from 16.5 Australian cents to A$2.20 in the year to October, with its Flying Fox
nickel prospect rated one of the best recent discoveries in Australia.
The short supply of some commodities also applies to mining stocks and is a factor in the stockmarket boom.
The market's resource sector has shrunk in the past 10 years. There has not been a mining boom since the
late 1980s and low commodity prices have taken their toll with companies merging to gain size and improve
shareholder return. After a series of mergers--such as BHP and Billiton, CRA and RTZ Corp. into Rio Tinto--and
takeovers such as Xstrata's swallowing of the lead-and-zinc miner MIM earlier this year, there is less choice of
stocks in which to invest, with fewer than 10 miners capitalized at more than A$500 million.
Sydney company Red Metal is expected by stockbrokers to be one of the sector's hottest floats when it lists
with an issue of 60 million shares at 20 Australian cents each to raise A$12 million for copper exploration. The
company has an alliance with the world's largest copper producer, Phelps Dodge, under which they share the
costs of exploration. Red Metal's managing director Robert Rutherford, a former Australian exploration manager
of Phelps Dodge, says in recent years new exploration away from existing mines has almost dried up in
Australia. This has enabled Red Metal to buy "fantastic ground," leases with good prospects, and it has an
aggressive drilling programme ready as soon as it joins the stock exchange, which is expected in late October.
He says interest has been high from institutional as well as small investors, with the issue being
over-subscribed. Rutherford acknowledges the company's timing has been excellent but says it has planned
the float for two years.
COPPER'S NEXT
With the nickel price having risen so far, so fast, investors are turning to copper as the next commodity likely to
take off. Analyst Ray Chantry says new projects will not be enough to account for demand over the next year
and believes the copper price, at 88 U.S. cents a pound, is heading towards $1--it averaged about 70 U.S.
cents in 2002. China is the world's largest copper consumer and Chantry says if the recovery continues in the
United States and Japan, the shortage will worsen. The major producers have already reacted. BHP Billiton had
stopped production from its Tintaya copper mine in Peru in January 2002 because of rising inventories
worldwide but resumed mining in August when it saw the market improving. In June the company announced it
would proceed with the Escondida Norte copper project in Chile to maintain production from the Escondida
mine, the world's largest copper mine.
Miners have provided some of the most exciting times in the Australian stockmarket but they have also
accounted for plenty of busts, with investors stampeding into companies whose discoveries later turned out to
be disappointments. After a long slump there is less expertise around the financial market for an industry that
requires knowledge of geology and accounting. Analysts left the sector during years of low activity, a period
when interest in mining was so low that several miners transformed into dotcom companies. Meanwhile, many
investors will be new to the sector, particularly the speculative end, but that is not keeping them out, with
stockbrokers attributing falls in industrial stocks to investors selling those shares to switch into resources.
Stockbroker Chantry says this boom will reinvigorate Australia's resources sector. But he says investors will
have to find companies where management has a track record of finding and developing resources, with
access to prospective mining leases and where money goes into exploration and mining rather than fees for
directors and consultants. "We are looking for companies with good people, good areas and where the money
goes into the ground," he says. |
