Mines & Money Melbourne

Mines and Money in Melbourne
– More bullish news!

Key Points

Tough market conditions continue for the general resources sector locally but the international picture is providing broad and conclusive evidence for a very good 2014. Action in the smallcap space is encouraging for all of us.  The bears’ last gasp attempts are now failing against the growing surge of expanding demand from China and the other emerging countries for gold, oil, copper, iron ore and coal.

The action of the past couple of weeks can be focused on a recently attended conference.  The Mines and Money (M&M) people organised their first-ever M&M in Melbourne to tap into the growing confidence of that city as Australia’s leading resources investment centre with resources sector leaders BHP, RIO, Orica and a few others standing out and being well supported by ANZ and NAB on the banking side.  The activity there is real a with a certain sense of power that is a little classier than Perth with its oil and gas, gold, iron ore and nickel and stronger than Brisbane’s coal and oil and gas and well ahead of Adelaide’s oil and gas and its new forays into copper and iron ore.  Darwin has been booming in a real pioneering sense with its LNG and other petroleum activities.  Makes Sydney seem very sleepy.  And of course Hobart, well don’t bother waking them up.

This Conference was notable in having an outstanding series of speakers ranging from Rick Rule of the Sprott Group and Chris Powell from GATA in the US to Dr Pan Guocheng and Chen Biao from China with talks about iron ore and coking coal. Shaun Browne from AME with its extraordinary data bases reinforced the view that China had only been having a quiet breather that did not even rate as a cyclical slowdown in a secular bull market in iron ore and steel.

Rod Whyte, a veteran Aussie broker in London provided his valuable perspectives whilst UBS and Morgan Stanley gave some views on the mixed outlooks for copper (good) and nickel (soft). Sean Russo gave his usual passionate spiel on hedging and Richard Karn showed he knows more about strategic minor metals than anyone on the planet.

The attendance was down on the organiser’s expectations but we probably haven’t seen an investor-crowded conference since the 1980s.  Talk about Disbelief and Pessimism! And we have yet to see the adornment girls that were ubiquitous and essential at every event in the exciting markets of the 1980s.

Rick Rule put it well with his comment on `Professional’s Capitulation’ whereby even the pros and diehards have thrown in the towel and are now focussed on other sectors.

Conferences are interesting places to see key industry spokesmen, commentary and debate on major issues, chances for companies to showcase their projects and of course to catch up with old friends.  I think M&M in Melbourne was very useful for all these reasons.

It was also useful noting a number of new private equity players on the scene and also some of the North American royalty and product streaming companies offering non-equity and non-debt financing.   Each has its place in the broader capital markets and as at present, the lack of equity investors certainly makes these forms of financing attractive.

These conferences are also reflections on the markets   No sponsorship from ASX or even TSX this time and certainly not much from brokers.  Investors were few and far between.  These are the signs of the `professional capitulation’.

Moving on, you would have noted that I have tended to focus on the major global markets and follow many major resources related indices as indicators or proxies on what should be happening here.  The senior North American stocks tell us a lot about how the world is really travelling and how the major investors are viewing the commodity sector.  Take oil for example.

I have suggested that oil seems to be leading the commodities higher reflecting strong demand and limited new supply.  Oil is having a slight breather just now but inventories are still tight, China is now a bigger importer than the US and the US tight oil business seems to be having a few operating issues to deal with.  Tight oil production figures from the Bakken, Eagle Ford and others are on track to reach a combined 2-2.5mmbblpa in 2017 but a disturbing trend is now showing that single well production declines appear to be steeper than expected so that production declines now make up 6.6% of total production, 20% higher than 5.5% in 2012.


Source: ASPO

This means these fields need to produce 6% more each year to offset the declines before seeing production growth. Costs are also rising per recovered barrel and many of the sweet spots seem to have been already discovered.  No panacea here for long term US oil supply from these fields.  The US will remain a net importer of oil.

No drama on the oil price itself, just coming back to support on both the downtrend and uptrend lines.  This is often a very typical technical feature pullback to support and should be the base for another advance.   Recall that US Exploration and Production stocks recently made new all-time highs and did so with little fanfare.

http://stockcharts.com/c-sc/sc?s=$WTIC&p=M&st=1980-07-13&en=(today)&i=p74540382760&a=295571898&r=1384120885991

You should then look at Copper with the Freeport price powering on.  A pullback is possible but bears don’t have shares.  Freeport is leading copper.  Copper technicals are looking encouraging and LME inventories are 32% lower than the peaks in June and are just 462kt against 20mtpa consumption.

But the bigger picture is that many large cap basic materials stocks in the US are having strong performances from extended periods of low prices.   Alcoa has been mentioned previously but have a look at US Steel and Cliffs Resources.

US Steel.  What can you say?  Already up 71% from its June low.  Cliffs is a little less exciting but the downtrends are being broken everywhere.

US Steel.png

Chinese steel is still strong and around 780-800mtpa. The iron ore price is challenging US$140/t again so that it is A$145/t and very profitable for producers such as BHP, RIO, FMG, AGO and good for juniors.  I still think new highs are coming within a year or so.

Gold is still intriguing and I am still running with the idea that the low was seen back in June. Low gold prices mean that physical demand will be strong, particularly from China and India (despite the import restrictions but note an election is due in June 2014).  Also note that COMEX gold inventories of `registered’ gold available for immediate delivery is down to just 638koz, the lowest level in this bull market.  Gold is almost back to supporting on the latest downtrend line after breaking upward a few weeks ago.  Technically positive.

http://stockcharts.com/c-sc/sc?s=$GOLD&p=D&yr=1&mn=0&dy=0&i=p27163996205&a=323438098&r=1384298929129

Also of interest is the way gold stocks are not weakening as much as the gold price suggesting that gold stocks want to rally and perhaps gold might do that also.

Short term steadying     Long term grossly oversold against gold
http://stockcharts.com/c-sc/sc?s=$XAU:$GOLD&p=M&st=1980-01-03&en=(today)&i=p79093628381&a=295490354&r=1384300882124

Again on the macro, do note the outcomes from the four day 3rd Plenum Meetings in China held last weekend. Proposed reforms will assist in growing China but the details are still awaited.  The Chairman of Chinalco has already indicated that the proposed changes to Chinese economic policy should be very good for resources and echo the comments from BHP and FMG as well as others that Chinese demand is increasing.

Whilst crude steel production in China is almost 600kg/capita, a high figure in world terms, it must be appreciated that total production since 2000 is only 6,000mt or just 4.5 tonnes/capita conservatively assuming all steel is used and no net exports.  The capital stock in steel for many  OECD countries is 10-15t and nearby countries such as Japan and Sth Korea have as much as 20t/capita.  China has a long way to go building those roads, offices, apartments, high speed rail (at 30,000t per metre to give the straight elevated platforms or so I have been told), bridges and roads.  And then cars and trucks.

Some other data from China indicates that online sales will make up 45% of total retail by 2015 and that the more than 400 cities with over 1 million people will make up 75% of world growth by 2025.  If you haven’t yet been to China you probably won’t really appreciate the enormity of that country.

In keeping with the macro themes it is important to also keep watching the US bond market as the key to the resources markets.

The low in yields for the past 32 year cycle certainly appears to have made been in July 2012 and is now in a long term uptrend that will probably be at least 30 years in duration.  The last one was for 39 years of rising bond yields before peaking in 1981.

The short term yield changes look powerful and the long term `rising wedge’ shape for the 30 year Treasuries does suggest sometime soon there will be a crack in price.

I provide these graphics to encompass prices histories and major changes in trends and usually the price patterns give helpful indications of future market activity.  The circle used here is a bit of fun but you just have to ask `Why is it so?’.  It certainly suggests something is occurring as the energy of the market place is manifest in a certain symmetry.

Long Term 30 Year T Bond Price    Medium Term 30 year T Bond Yield
http://stockcharts.com/c-sc/sc?s=$USB&p=M&st=1980-07-13&en=(today)&i=p17206863323&a=273626798&r=1384301575105 http://stockcharts.com/c-sc/sc?s=$TYX&p=W&yr=5&mn=0&dy=0&i=p30217644434&a=322979898&r=1384301615220

A recent report from Reuters indicated a US$54bn inflow to equity mutual funds in October in the third largest inflow on record and all three records inflow levels have occurred in 2013.  The US$286bn year to date figure is the largest since 2000.

In contrast, bond fund posted five consecutive monthly redemptions outflows since late 2003 with US$13.5bn in October being almost three times that of the US$4.9bn in September.

This is the `Great Rotation’ and is clearly indicating an improving economy and not the end of the world.

The resources market here in Australia is also getting its own share of excitement as beaten down companies come up from their lows with good bounces and surges.   The major XMM has now broken the April 2011 downtrend so expect a good long term upswing to begin to accelerate soon.

Whilst we haven’t got the indices moving all that much, individual stocks have done well.   Have a look at these in order of size.

Stock ASX Mkt cap A$m June low Current
Price
Recent high % change
Now vs low
% change
High from low
Fortescue FMG

17,400

2.87

5.58

5.62

94

96

Orecobre ORE

266

1.32

2.26

2.46

71

86

LNG Ltd LNG

98

0.12

0.32

0.385

167

221

Kimb.Diamonds KDL

51

0.24

0.83

0.86

248

258

Minemakers MAK

40

0.092

0.16

0.18

79

96

Kings R Copper KRC

21

0.024

0.14

0.26

483

983

Lamboo Res LMB

13

0.075

0.18

0.185

140

147

Note that even big stocks can make good moves as we can see from FMG.  I expect to see similar moves in other stocks as we run into the end of year period.  The signs to date are that 2014 will be a very good year!

Here at Paradigm we have participated in several capital raisings since June and these have been performances.  It is safe now to go into the water.

June low Acts Placing price Acts Current price Acts Recent post placement high Acts % change
Now vs placement
% change
High from placement
GGX

1.9

2.2

2.4

2.9

9

31

SOC

10.0

20.0

22.0

24.5

10

22

ELT

1.0

1.4

2.2

2.5

57

78

LMB

7.5

6.0

17.5

13.5

125

208

QHL

13.5

20.0

22.5

31.0

12

55

LNG

12.0

20.0

32.0

38.5

60

92

Stock Recommendations

I have refrained from making specific stock recommendations for a while during the wild irrational volatility of recent times but I now consider that the case for a strong 2014 is well positioned and the evidence to confirm this view is now around us daily.  Also keep in mind that many projects are now in operation and these will generate a lot of cash so the stocks are likely to have some large increases in dividends, particularly in 2014.  So here we go.
Large caps  –     Iron ore coal and petroleum look good

Stock Price Mkt cap A$m Sector Operations Price drivers Yield %
BHP

37.88

122,140 Diversified Copper, coal iron ore oil Output growth 3.3
FMG

5.58

17,360 Iron Ore Pilbara Output growth 3.6
STO

14.85

14,400 Oil and Gas Cooper   Qld/PNG LNG Output growth 2.3
WPL

39.23

32,320 Oil and Gas NWS Oil gas LNG Output growth 5.1
OSH

8.44

11,377 Oil and Gas PNG MENA Output growth 4.4

Mid caps  Iron ore copper

Stock Price  Mkt cap A$m  Sector  Operations  Price drivers  Yield% 
AGO

1.16

1064

Iron ore Pilbara Output growth 4.0
AQA

2.25

926

Coking coal Iron ore Qld Pilbara Project develop n. a.
IGO

3.77

879

Gold Nickel Yilgarn Output growth 1.1
ERA

1.28

665

Uranium Ranger Uranium  price n. a.
DLS

1.22

525

Oil and Gas Cooper Basin Output growth n. a.
WSA

2.60

510

Nickel Yilgarn Output growth 2.5
CDU

1.98

405

Copper Cloncurry Output growth 15.0

Small Caps

Stock Price Mkt cap A$m Sector Operations Price drivers Yield%
NST

0.71

301

Gold Ashburton Basin Output growth 5.6
ORE

2.26

266

Lithium Argentina Project develop n. a.
ALK

0.38

144

Rare Earths Dubbo Zirconia NSW Project develop n. a.
CTP

0.40

123

Oil and Gas Amadeus Basin Project develop n. a.
LNG

0.30

95

LNG Magnolia Proj La USA Project develop n. a.

Micro Caps

Stock Price Mkt cap A$m Sector Operations Price drivers Yield%
REY

0.115

73

Oil and Gas Canning Basin Exploration n. a.
AJQ

0.24

53

Oil and Gas Macarthur Basin Project develop n. a.
ROL

0.40

41

Gold +BM Indonesia Project develop n. a.
MAK

0.16

38

Phosphate Northern Territory Project develop n. a.
IBG

0.054

22

Zinc Greenland Project develop n. a.
CNQ

0.06

17

Tungsten Atherton Tableland Mine expansion n. a.
AGE

0.07

14

Uranium Northern Territory Exploration n. a.
BLK

0.15

13

Gold Near Wiluna Project develop n. a.
LMB

0.17

13

Graphite Kimberleys Project develop n. a.
MAU

0.13

11

Iron ore Magnetite near Perth Project develop n. a.
ANW

0.008

5

Tin Taronga NSW Project develop n. a.
KBL

0.054

21

Copper gold Lachlan Fold Belt Mine expansion n. a.
GGX

0.023

16

Oil and Gas Philippines Project develop n. a.
These stocks are chosen based on assessment of near and medium term potential. Potential problems exist for all of them due to currency or product price and management issues can always arise.
Everyone should also note that there are hundreds of resources companies listed on ASX and many have quite decent projects and operations. Almost all have been starved of capital over the past six years so will need additional funds to develop projects into cash earning operations.
You should take advantage of low prices to gain highly leveraged positions in assets that must be more valuable tomorrow than the prices applying today.

Follow me on Twitter @DawesPoints

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