Mines and Money in Melbourne - More bullish news!

Key Points

• Melbourne looking a very civilised city!

• Rick Rule seeing value and turning bullish

• Presentations with strong outlooks for iron ore, coking coal and copper

• Strategic metals as good as ever

• `Professional's Capitulation' has arrived and passed

• North American major stocks in cyclical upturn

• US Treasury Note yields rising with stronger economy

• China's 3rd Plenum Sessions should be powerful for resources

• Market internals very encouraging for resources

• 30 recommended resource sector stocks

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. 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. 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. 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

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

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.