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brw daily ... resources boom

  1. rembrandt

    5,803 posts.
    Hmmm... BRW Daily.

    Rumble of a resources boom
    By Tim Treadgold
    Monday, February 3, 2003

    Investing in the Australian resources sector over the past 20 years has been like buying lottery tickets, producing a handful of winners and too many losers. Failed projects have destroyed billions of dollars in shareholder wealth, metal prices have been at all-time lows, exploration has dried up, and other countries have become preferred destinations for mine development. Little wonder that stockbrokers, government and the media have turned their backs on the mining and oil industries. And little wonder that these outside critics are missing the turn.

    Conditions have changed for Australian resources. Prices for key commodities such as iron ore, gold and nickel are rising strongly. The immediate outlook for coal is flat, but only after several good years, and oil and natural gas exports are increasing rapidly. Australia's appeal as a resources investment location is on the rise, mainly because so much of the rest of the world has become substantially more risky. Land access for explorers remains a problem, but recent court cases - such as the December 12, 2002, Yorta Yorta decision by the High Court, which makes it much harder to prove native title - are easing some of the concerns.

    And beyond these developments is China. For whatever reason, China has conferred on Australia the status of preferred supplier of raw materials. More importantly, China has become one of the main investors in Australian resources in order to ensure long-term supplies for its booming manufacturing sector. As the rest of the world watches China soak up new investment dollars to build factories, it is the reverse for Australia. China is investing here in new iron ore, nickel and natural gas projects. The iron ore industry is the best example of what is happening. Four years ago, Japan took two tonnes of iron ore for every one tonne going to China. This year, it is tonne for tonne. Japan is not shrinking; Chinese demand is growing spectacularly.

    It would be a courageous - should that be foolish? - observer who would cry "Boom!" about Australian resources. Before the sector can fully revive, there are hurdles to cross. Exploration, or the lack of it, is a critical issue because it is the engine room of future mines. The world economy is sluggish. Europe, Japan and North America are not growing rapidly. War is a real possibility in the Middle East. Terrorism threatens entire industries, especially the aluminium-consuming aviation sector. The value of the Australian dollar is rising, which can be seen as a compliment to the economy, or as a threat to future income streams on commodities sold in US dollars.

    But having noted the negatives, it would be equally unwise to ignore the evidence that a long-term upward trend is developing - and Australia has struck it lucky, yet again. Australia does have important natural advantages in the resources world. It is on China's doorstep. It has an abundance of raw materials, and a skilled and professional workforce. There may not be a shortage of iron ore, gold, zinc, copper, nickel, bauxite and natural gas around the world, but there is a shortage in developed, safe countries where the certainty of title is strong and it is highly unlikely that a man in a jeep with a Kalashnikov will drive through the front gate and shut your mine. That has happened in Sierra Leone, Indonesia, PNG, and other resource-rich Third World countries.

    Imagine the decision-making process in the New York or London boardroom of a global miner when directors are faced with a choice of investing in a new project in central Africa, South-East Asia or Australia. The choice of where to send shareholders' funds becomes a lot easier when countries such as Australia or Canada are options. Mining in developed and civilised countries now looks a lot safer than dealing with the undeveloped world. It is why there has been wholesale takeover activity by international companies of Australian resources.

    Australia should play to its natural advantage. Rather than making it harder to explore and mine, governments should find ways to make it easier. It is not good management to offer too much taxpayer-funded assistance to biotechnology companies and software designers. The best way to run a company - or a country - is to play to your natural advantage and encourage industries that create genuine, long-term wealth and which do not disappear when the government cash dries up.

    The resources sector today is grossly misunderstood. Politicians run scared from all extractive industries. Stockbrokers have scorched too many clients with dud stocks. The news media have switched staff to more popular rounds, such as finding the best latte in Woollahra in Sydney, Toorak in Melbourne or West Perth. It is this wholesale switch-off, and the patchy research, that explains why the big picture is being ignored and new investment opportunities are being missed. The few remaining gold analysts in Australia are getting excited. Oil prices have the trade press humming. But no one is pulling together the common threads of rising prices, Chinese demand and Australia's haven status, which all point to a period of substantial resources growth ahead.

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    This is only my view ... read the red stuff.

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