Natural resource veteran Rick Rule was in town last week and declared 800 of Australia’s mining companies mostly garbage.
That’s a pretty big call, but probably right.
We trust his judgement. If you’re unfamiliar with his name, Rick Rule has been investing in natural resources for over forty years.
He spoke for free to a select group of Port Phillip Publishing subscribers. Suffice to say, he’s seen the same cycles play out over and over again.
But don’t be misled by our opening comment. He sees plenty of opportunity in Australian resource stocks. Some of the news this week would suggest he’s right. He doesn’t appear to be alone, either…
Major Companies Still Interested in Australia
One reason the Aussie dollar appears to be holding up better than expected is that there is still foreign investment money flowing into Australia.
That’s bucking a global trend of declining foreign investment, according to a new OECD report. From all accounts, this is mostly resource related in the case of Australia.
You might remember a few weeks ago we mentioned some of the international energy majors showing interest in Australia’s oil and gas sector.
The trend is holding. Take this from the Australian this week:
‘The nation’s shale and other unconventional gas plays are drawing growing international interest as horizontal drilling and hydraulic fracturing techniques that turned a US gas shortage into a glut are starting to be employed to a greater extent. Gas prices in Australia, where LNG-led demand is surging on the east coast and where the west coast has long had high prices, are also an attraction, contrasting with depressed US prices.’
This is the move Dan Denning has been hunting with great success over at The Denning Report. He still sees plenty of opportunity in this sector too. You can see why here.
Dan has his subscribers in some of the smaller energy stocks on the Australian market. Part of his strategy has always been the assumption they could become a juicy takeover target to an energy major. The big guys need to replace production by adding reserves.
To get an idea of how lucrative takeovers can prove to be, you only need to check out the share price rise of Warrnambool Cheese and Butter, from around $4 to over $8 thanks to a bidding war. If you’d managed to ride the whole wave up so far, you’d be sitting on an over-100% gain.
Granted, it’s pretty hard in circumstances like that to know when to bank your gain, but you get the idea.
We Bet You Didn’t Expect This Five Months Ago
Mind you, not every investor is a fan of taking a position in a company on the prospect of it becoming a takeover target.
Kris Sayce over at Australian Small-Cap Investigator isn’t usually, especially if the company isn’t yet profitable.
He prefers to invest on the fundamentals, and if a takeover offer comes along, take that as a bonus.
But Kris is still interested in resource stocks. Generally, they’re beaten down in price and investors aren’t interested, on the assumption that commodity prices are going to fall.
But the iron ore miners reminded us all how profitable resource shares can be if you get in at the right time and the market doesn’t move as everyone expects.
The price of iron ore, for example, has stayed up. Result?
The Australian reported that Mount Gibson Iron is up 111%, Arrium 93% and Fortescue Metals Group is up 92%, all since June 30 of this year.
Now there’s a suggestion the oncoming Chinese winter could drive iron ore back over $US140.
But Kris isn’t talking about iron ore. That rally has probably made its move for now anyway.
However it is interesting that Xiong Weiping, the chairman of the big Chinese mining company Chinalco, forecast this week that Chinese commodity demand will outstrip its economic growth in the next few years.
He’s hardly an independent voice, but notable because he emphasises that China’s industrialisation is far from over. That’s the same point Tom Miller makes in the book we mentioned last week, China’s Urban Billion.
Rick Rule broadly made a similar point about Asia in his presentation.
That’s good news for investors if you can identify the growth industries in China. And one of those is bound to be in dealing with the level of pollution.
From reports, this is one of the big sources of public anger in China. It lowers quality of life, affects the Chinese tourism industry and is so bad it causes respiratory deaths and diseases.
China needs to cut down on the level of emissions. A big part of that will be reducing its reliance on coal. Another will be reforming the automobile market.
But the car makers are already moving.
That’s where Kris Sayce says he’s found an edge for Aussie investors. You can check it out here.
Callum Newman+
Editor, Money Weekend
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