Steve's note: Contributing today's essay is my friend and colleague Dan Denning. For making sense of what's going on around the world – and profiting from it – Dan is among the best. And he's writing from one of the world's hottest commodity markets...
The Coming Boom in Australian Resource Stocks
By Dan Denning, editor, Australia Mining and Resource
Report
May 9, 2008
It takes nearly five hours by plane to get from my new hometown of Melbourne, Australia to the Timor Sea, the body of water that lies off Australia's northwest coast.
I've made the trip several times now on my way to Singapore and other destinations in Asia, Europe, and Africa.
Out the plane window, it looks like a lot of nothing... But all that space you fly over between Melbourne and the northwest coast... now that's what today's investor needs to know about.
In America, some people jokingly call it "flyover country," as if everything between New York and Los Angeles was just an afterthought.
America's so-called "flyover country" is home to rich corn and wheat fields, the massive coal deposits in Wyoming, the remnants of the Mesabi iron range in Minnesota, and of course, what's left of the producing oil and gas fields in Texas and Oklahoma.
Australia's "flyover country" today is on the verge of the same kind of boom that took hold in America 100 years ago. You see, Australia is home to nearly all the valuable mineral and metal deposits needed for the industrialization of China and India.
How much mineral wealth is buried in the Outback?
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Australia ranks No. 1 globally in Economically Demonstrated Resources (EDR) of zinc, nickel, lead, thorium, tantalum, and mineral sands (rutile and zircon). It ranks in the top six EDR for bauxite, black coal, brown coal, copper, gold, iron ore, manganese ore, niobium, silver, and uranium. The Olympic Dam Mine (in South Australia) is home to nearly 476,000 tons of uranium – 18% of the world's known reserves.
Let me be clear, though. It's not just what Australia is capable of producing that excites me so much. It's what the country is already producing. Amid rising commodity prices, resource producers in Australia are benefiting right now from the scorching supply/demand dynamic.
Export earnings from Australian
commodities should rise by 30% in 2008, thanks to demand
for iron ore, coking coals, gold, and crude oil. And Australia
is the world's single largest shipper of coal, iron ore,
and wool.
As an investor, you must pay attention to two factors at work here. First, many small and unknown (at least in the U.S.) Aussie companies are sitting on assets that are rising in value. That alone is extremely bullish.
The second factor is that the companies that own the assets and can produce them will almost surely report massive earnings growth in the last three quarters of 2008. The stocks of these producers – based on our analysis – don't fully reflect that earnings growth.
It's clear that the bull market in resources is alive and well. I see three main factors driving this bull market. The first, as you probably know, is that commodities are coming off a low base. The bear market in commodities lasted 20 years. The second reason is supply has still not caught up with demand. A decade of low commodity prices resulted in chronic under-investment in new productive capacity. The third factor is what makes this resource cycle different from the rest – it's the strength of new demand from China.
How can you participate in this opportunity in Australia's resource stocks?
Of course, you can buy the big institutional favorites, like BHP Billiton (BHP). But I think the really huge money will be made here by owning junior miners and mining infrastructure stocks.
The iron ore juniors and coal companies aren't hated, like my friend Steve Sjuggerud likes to see... but they are even better... unknown! Throw in cheap and at the beginning of an uptrend, then you get two out of Steve's three factors.
The nice thing about the resource sector here is that there are far more stocks than analysts. With all the underlying resource prices in an uptrend... it's just a question of who's willing to do more homework to find small companies with economic resource assets.
I think the opportunity in small Australian resource shares is so exciting, I actually moved here to learn as much as I can and find the best investments. While I don't expect you to do the same, I can encourage anyone interested in making money in resource stocks to become familiar with the place immediately.
Good investing,
Dan Denning
P.S. I've just completed a full report on the best opportunities in Australian mining stocks. I guarantee you won't find in-depth research on these companies in the U.S., which makes them an outstanding, undiscovered way to make money in the resource bull market. Click here to read more about this report.
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