Gold News

Crossing the Rubicon

We've crossed a threshold in the markets, says Dan Denning in Melbourne. Investors must choose paper
or stuff, equity or energy...

According to a report released today by the Minerals Council of Australia, “Australian production of the bulk commodities (i.e. all types of coal and iron ore) is expected to increase approximately 9% on average. Base metal production (copper, nickel etc) is expected to increase by approximately 10% on average. Aluminium and alumina production is expected to increase by approximately 0.1 and 12.4% respectively (all ABARE forecasts).”

So the minerals super-cycle shows no visible signs of slowing down. Supply, even though new producers come on line each day, simply can’t keep up with demand. This leads, as it must, to rising prices for nearly all Aussie-based resources.

The report continues: “Prices for bulk commodities (i.e. all types of coal and iron ore) are expected to increase on the whole with the exception of metallurgical coal. Base metal prices (copper, nickel etc.) are expected to increase by approximately 50% on average, and aluminium and alumina prices are expected to increase.”

But as we scanned the papers early this morning we found the obvious corollary to the attempts by mineral producers to expand capacity: the boom in mining services.

“Investment in the mining industry, which has more than tripled in the past five years, is expected to rise further during the next two years to peak in 2007-08, providing further upside for mining service companies,” reports Fiona Tyndall. “It will mean earnings growth for listed resource-allied companies such as Bradken (ASX: BKN), Macmahon Holdings (ASX: MAH), and Monadelphous (ASX: MND).”

Ben Griffiths of Eley Griffiths says, “There is a substantial inventory of world-scale mining and mineral processing projects awaiting sign-off over the next 12 to 18 months. Companies such as United Group (ASX: UGL), Bradken, RCR Tomlinson (ASX: RCR), and Coates Hire (ASX: COA) should be big beneficiaries if work proceeds."

We drilled a little further down the list of public companies in Outstanding Investments and found some new listings we liked even better. But a sure sign that the boom is still strong is that the market is giving new investors new shares to buy every day. The appetite for mining-related shares is nearly as great as the appetite for the minerals themselves.

Today we read that Rubicon Resources, a West-Australian based gold and base metals exploration company, has lodged a prospectus with ASIC to raise about $10 million through an IPO on the ASX. We mention it not because we know anything special about Rubicon...but because the name seems appropriate for where we are in the cycle.

We have crossed a threshold in the markets where investors must choose where to direct their capital...resources or financial stocks...paper or stuff...equity or energy.

In a media announcement, Rubicon says it “has secured an agreement to acquire from Heron Resources (ASX: HRR) 100% of the rights to seven gold and base metal projects largely in Western Australia.” This doesn’t mean the company will find any gold or base metals. You’d have to ask an independent geologist about the prospects of the properties. And as our friend Rick Rule is fond of saying, a gold mine is usually nothing more than a liar standing over a hole in the ground.

But if precious metals and minerals prices are to come down in the next few years, it will either be because demand has fallen globally or because new supply has been created. And if it’s the latter, then it means new companies will have to become new producers.

Frankly, as fraught with risk as buying new mining and resource companies is, it strikes us as a better bet than, say, buying Qantas Airlines stock right now. As we write it appears that the Qantas (ASX: QAN) board has accepted the revised offer from the Macquarie-led consortium. The increased offer will stand at $5.60. Credit ratings agency Moody’s is expected to downgrade Qantas credit due to the large amount of debt that will be pushed onto the airline's books...

Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

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