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December 21, 2009

Don’t Yield To This

By Rob Davies
www.minesite.com/aus.html


Inflation, or at least fear of inflation, is the main reason people invest in commodities. Over the last three decades that threat has been policed by the bond market that simply would not allow governments to be profligate with debt. As former President Bill Clinton once said, this time probably truthfully, that if reincarnated he would want to come back as the bond market because it is the ultimate master.

Bizarrely over the couple of years of this financial crisis the bond market has accepted the huge demands made on it by governments everywhere. At a time when equities, property and commodities were all cratering fixed income was, on a relative basis, a safe place to be. But there are signs that view is changing as the sheer scale of the issuance required to refinance Uncle Sam, and other governments, becomes ever clearer. Over $1.6 trillion of US debt comes due by March 31st alone and 36 per cent of total US debt is short term, i.e. matures in less than one year. That makes the risk of holding it fairly low and is therefore popular. There is, though, the risk that interest rates will rise and the cost of refinancing this debt will soar uncontrollably.

Like any sensible finance manager Uncle Sam is seeking to extend the maturity of its debt by issuing long dated bonds of ten years or more as the short dated debt matures. These of course carry a lot more risk. While the nominal return might be known the real return, after inflation, is harder to gauge. To compensate for this additional risk investors want a higher return and yields for 10 year Treasuries have gradually been edging up and reached 3.51% this week. That had the effect of taking the gap between two year and ten year money to 276 basis points: its highest ever. Since analysts are expecting 10 year Treasury yields to increase to 4.5% next year this feature does not look like a temporary phenomenon.

This means two things. Firstly, bond markets are beginning to price in the level of issuance it is going to have to cope with. Secondly, fixed income investors are now starting to factor inflation fears into prices. Other asset markets price off US Treasuries as the biggest and most liquid asset class. Although gold had a poor week, base metals reacted positively because of a stronger dollar. Not only did spot prices move up, cash copper for instance rose 1.4 per cent to US$6,900 a tonne, but forward prices increased slightly more. As interest rates move up the contango needed to keep future prices in line must also rise. So that was why copper for 15 months’ time rose 1.8 per cent to US$7,010. Although not all metals moved the same way the majority did. Cash nickel rose 3.25 per cent to US$17,000 a tonne while 15 month metal increased 3.95 per cent to US$17,225. Zinc for immediate delivery rose 4.2 per cent to US$2,339 a tonne but 15 month metal increased even more, 4.33 per cent to US$2,460 a tonne.

The next year or so will see the start of a massive programme to refinance debt in the developed world. It may also be a time when interest rates start to rise. Since the US Treasury market is the 800 lb gorilla in the room how it decides to throw its weight around will demand the fate of all other asset classes. Commodities are tiny in comparison and metal prices will be very dependent on exactly how that primate behaves. Let’s hope he is well treated. If he is maltreated a lot of lesser beasts, including metals, could get badly hurt.
 
Dec. 21, 2009

Gas could be the cavalry in global warming fight
By MARK WILLIAMS

An unlikely source of energy has emerged to meet international demands that the United States do more to fight global warming: It's cleaner than coal, cheaper than oil and a 90-year supply is under our feet.
It's natural gas, the same fossil fuel that was in such short supply a decade ago that it was deemed unreliable. It's now being uncovered at such a rapid pace that its price is near a seven-year low. Long used to heat half the nation's homes, it's becoming the fuel of choice when building new power plants. Someday, it may win wider acceptance as a replacement for gasoline in our cars and trucks.

Natural gas' abundance and low price come as governments around the world debate how to curtail carbon dioxide and other pollution that contribute to global warming. The likely outcome is a tax on companies that spew excessive greenhouse gases. Utilities and other companies see natural gas as a way to lower emissions - and their costs. Yet politicians aren't stumping for it.

In June, President Barack Obama lumped natural gas with oil and coal as energy sources the nation must move away from. He touts alternative sources - solar, wind and biofuels derived from corn and other plants. In Congress, the energy debate has focused on finding cleaner coal and saving thousands of mining jobs from West Virginia to Wyoming.

Utilities in the U.S. aren't waiting for Washington to jump on the gas bandwagon. Looming climate legislation has altered the calculus that they use to determine the cheapest way to deliver power. Coal may still be cheaper, but natural gas emits half as much carbon when burned to generate the same amount of electricity.

Today, about 27 percent of the nation's carbon dioxide emissions come from coal-fired power plants, which generate 44 percent of the electricity used in the U.S. Just under 25 percent of power comes from burning natural gas, more than double its share a decade ago but still with room to grow.

But the fuel has to be plentiful and its price stable - and that has not always been the case with natural gas. In the 1990s, factories that wanted to burn gas instead of coal had to install equipment that did both because the gas supply was uncertain and wild price swings were common. In some states, because of feared shortages, homebuilders were told new gas hookups were banned.

It's a different story today. Energy experts believe that the huge volume of supply now will ease price swings and supply worries.

Gas now trades on futures markets for about $5.50 per 1,000 cubic feet. While that's up from a recent low of $2.41 in September as the recession reduced demand and storage caverns filled to overflowing, it's less than half what it was in the summer of 2008 when oil prices surged close to $150 a barrel.

Oil and gas prices trends have since diverged, due to the recession and the growing realization of just how much gas has been discovered in the last three years. That's thanks to the introduction of horizontal drilling technology that has unlocked stunning amounts of gas in what were before off-limits shale formations. Estimates of total gas reserves have jumped 58 percent from 2004 to 2008, giving the U.S. a 90-year supply at the current usage rate of about 23 trillion cubic feet per year.

The only question is whether enough gas can be delivered at affordable enough prices for these trends to accelerate.

The world's largest oil company, Exxon Mobil Corp., gave its answer last Monday when it announced a $30 billion deal to acquire XTO Energy Inc. The move will make it the country's No. 1 producer of natural gas.

Exxon expects to be able to dramatically boost natural gas sales to electric utilities. In fact, CEO Rex Tillerson says that's why the deal is such a smart investment.

Tillerson says he sees demand for natural gas growing 50 percent by 2030, much of it for electricity generation and running factories. Decisions being made by executives at power companies lend credence to that forecast.

Consider Progress Energy Inc., which scrapped a $2 billion plan this month to add scrubbers needed to reduce sulfur emmissions at 4 older coal-fired power plants in North Carolina. Instead, it will phase out those plants and redirect a portion of those funds toward cleaner burning gas-fired plants.

Lloyd Yates, CEO of Progess Energy Carolina, says planners were 99 percent certain that retrofitting plants made sense when they began a review late last year. But then gas prices began falling and the recession prompted gas-turbine makers to slash prices just as global warming pressures intesified.

"Everyone saw it pretty quickly," he says. Out went coal, in comes gas. "The environmental component of coal is where we see instability."

Nevada power company NV Energy Inc. canceled plans for a $5 billion coal-fired plant early this year. That came after its homestate senator, Majority Leader Harry Reid, made it clear he would fight to block its approval, and executives' fears mounted about the costs of meeting future environmental rules.

"It was obvious to us that Congress or the EPA or both were going to act to reduce carbon emissions," said CEO Michael Yackira, whose utility already gets two-thirds of its electricity from gas-fired units. "Without understanding the economic ramifications, it would have been foolish for us to go forward."

Even with an expected jump in demand from utilities, gas prices won't rise much beyond $6.50 per 1,000 cubic feet for years to come, says Ken Medlock, an energy fellow at the James A. Baker III Institute for Public Policy at Rice University in Houston. That tracks an Energy Department estimate made last week.

Such forecasts are based in part on a belief that the recent spurt in gas discoveries may only be the start of a golden age for gas drillers - one that creates wealth that rivals the so-called Gusher Age of the early 20th century, when strikes in Texas created a new class of oil barons.

XTO, the company that Exxon is buying, was one of the pioneers in developing new drilling technologies that allow a single well to descend 9,000 feet and then bore horizontally through shale formations up to 1 1/2 miles away. Water, sand and chemical additives are pumped through these pipes to unlock trillions of cubic feet of natural gas that until recently had been judged unobtainable.

Even with the big increases in reserves they were logging, expansion plans by XTO and its rivals were limited by the debt they took on to finance these projects that can cost as much as $3 million apiece.

Under Exxon, which earned $45.2 billion last year, that barrier has been obliterated.

The wells still capture only about a quarter of the gas locked in the shale formations. Future improvements could double that recovery rate. Bottom line: this new source of gas supply in Texas, Louisiana, Pennsylvania, North Dakota, New York and other states holds out the promise of as much as 2,000 trillion cubic feet of supplies. It is estimated that the U.S. sits on 83 percent more recoverable natural gas than was thought in 1990.

"The question now is how does this change the energy discussion in the U.S. and by how much?" says Daniel Yergin, a Pulitzer Prize winning author and chairman of IHS CERA, an energy consultancy. "This is domestic energy ... it's low carbon, it's low cost and it's abundant. When you add it up, it's revolutionary."

Source >> http://www.macon.com/nation/story/960198.html
 
Sliding back towards a Gold Standard
by Martin Hutchinson / December 07, 2009
http://www.prudentbear.com/index.php/thebearslairview?art_id=10318

Gold broke through $1,200 per ounce this week on rumors that the People's Bank of China might increase the percentage of gold in its reserves. The dollar, the euro, sterling and the yen all have good reasons to weaken, yet in our current global fiat money system, they have nothing to weaken against. Global foreign exchange reserves are at record highs, but there is nothing solid for central banks to buy. This all raises the interesting question: are we seeing the beginning of the end of the fiat money floating exchange rate system that has prevailed since 1973? And could something closer to a Gold Standard replace it?

At the extreme, it is very unlikely that in the near future we will go back to a full Gold Standard. We're unlikely in five years time to be wandering round with gold sovereigns or double eagles clanking in our pockets. Pity. However, it's quite possible for us to move some considerable distance towards a gold standard without actually getting to the final destination. And there are increasing signs that the world is heading in that direction.

The explosion in global liquidity in the last decade has had an effect on global central bank reserves, which increased 414% between 1998 and the second quarter of 2009 to $6.8 trillion, an annual rate of increase of 14.5%. This is more than three times the rate of increase of nominal Gross World Product of 4.6%. Put another way, central bank reserves increased from 4.2% of GWP to 11.1% during the 10 years 1998-2008.

The world therefore has been flooded with liquidity; Alan Greenspan and Ben Bernanke and to a lesser extent their counterparts in the ECB, the Bank of England, the Bank of Japan and the People's Bank of China, have a lot to answer for. Effectively they have by their own actions flooded the globe with paper money and made ordinary currency and short-term securities increasingly undesirable assets. It is thus not surprising that private sector investors and even central banks themselves are looking for something better. India's purchase in October of 200 tons of IMF gold (at a then value of $6.7 billion) was not a fluke.

The central bank search for an alternative to paper money holdings naturally leads them in the direction of gold. Gold has very few uses, so theoretically could lose its value almost completely if the world's markets decided that holding gold was no more sensible than collecting old tram tickets. However, in practice even in the disinflationary and economically ebullient 1980s and 1990s, the gold price dropped only to around $250 an ounce, a price equivalent to its extraction cost from the most efficient gold mining operations. (That cost is now around $400 per ounce.) After all, if investors had decided the stuff was of no interest, there's 50 years supply of it just lying around, so there would have been no need to produce any more, and no floor from mining costs on the gold price. In that case, gold would probably have dropped to around the $50 per ounce at which it becomes a plausible substitute for other metals in industrial uses.

So the world has bench-tested the Keynesian theory that gold is a barbarous relic, and found it wanting. Even in the 1990s, a time of peace and apparent disinflationary prosperity, investors – including central banks – wanted to keep a certain portion of their reserves in gold. Ideologically driven decisions, such as then UK Chancellor of the Exchequer Gordon Brown's sale of half Britain's gold reserves in 1999-2002, quickly came back to haunt the fanatic, as inflation-free prosperity dissolved and the normal world of economic toil and monetary sloppiness returned.

There are three ways in which the world could move towards a gold standard without actually getting there. First, the world's central banks, particularly the ones like China and Japan with the biggest reserve pools, could increase the percentage of their reserves kept in gold. According to IMF data, that percentage declined from 13.9% to 9.8% during the great increase in central bank reserves from 1998 to 2008 even though the gold price more than trebled during that period.

A return to even the modest 1998 percentage of gold reserves would result in gold purchases of $324 billion, surely enough to shift the gold market a fair whack. A return to a still modest ratio of gold holdings of 20% of reserves, which prevailed as recently as 1994, would result in central bank gold purchases of $867 billion, about eight years' mine supply at current prices, and more than 15% of all the gold now in existence.

Second, the world's monetary authorities could start targeting the gold price as part of their monetary management, aiming to keep it within a certain range, thereby preventing excessive monetary expansion and dampening excessive exchange rate fluctuations. A "hard money" Federal Reserve chairman, for example, worried about the value of the dollar, could seek to keep the gold price between $900 and $1,000. He would sell gold from Fort Knox when, as now, the price was above that range, but would maintain a stated commitment to buying gold if and when the dollar had strengthened sufficiently that the price fell below $900.

Such a policy would have the advantage that it would not result directly in manipulating the value of other currencies through central bank purchases or sales, thus minimizing the chances of protectionist retaliation. That's an especially valuable advantage when, as at present, the world is in a difficult and lengthy recession. Of course, as the United States sold gold from Fort Knox, the dollar might still decline against other currencies even as it rose against gold.

Finally, the world's politicians could decide that unlimited money creation was a thoroughly bad thing, and impose restrictions upon their monetary authorities, attempting to move monetary creation to the kind of automatic, limited mechanism that a gold standard naturally imposes. As the United States moves into its sixteenth year of Greenspan/Bernanke sloppiness since the monetary relaxation began in February 1995, we hard-money types have come to think nostalgically, not of the Gold Standard period, which almost nobody now remembers, but of the period of monetary stringency, sound economy and inflation reduction under Fed Chairman Paul Volcker and President Ronald Reagan, in the early 1980s.

Since even Paul Volcker will not live forever, it is necessary to Volckerize the Fed by some artificial statutory means, so whatever expansionary Princeton economics professor a deluded president may appoint to chair the institution, it is forced to follow a sound monetary policy. The best form of such a restriction would be to mandate that the Fed must keep the two-year average of the rates of growth of the M2, MZM and M3 monetary aggregates between 2% and 4% annually. The average of several aggregates would be used to minimize the distortions from one aggregate or another wandering off in a funny direction through technological change. (For example MZM increased exceptionally slowly compared to other aggregates during the 1970s and M2, the aggregate Greenspan occasionally glanced at, rose exceptionally slowly compared to other broad aggregates in 1995-2006.) That would prevent inflation from taking hold, while being sufficiently flexible to allow for technology-driven fluctuations in price levels and sufficiently expansionary to permit normal economic growth without deflation.

Such a program would mimic the Gold Standard, in which the increase in money supply depended on the rate of discovery of new gold, which fluctuated only slowly except with major gold discoveries such as California in 1849 and the Yukon in 1896-97. However, since the world's gold supply increases by less than 2% annually, an official Gold Standard may be thought somewhat deflationary – as well as giving apoplexy to the unfortunately numerous Keynesian economists who infest academia, officialdom and the media. A Volcker Standard, if sufficiently constitutionally embedded that short-termist politicians could not override it, would give the same advantages as a Gold Standard, without the dangers of deflation or Keynesian heart failure.

In three ways therefore, official gold purchases, gold price currency targeting, and a quasi-gold Volcker Standard, we are likely to approach a Gold Standard ever closer in the years to come. Inflationists and official opinion will sneer at the possibility. However the markets are already making it inevitable, fueled as they are by the excessive global money creation of the last fifteen years, and the money supply explosion since September 2008.

The Bears Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.

Martin Hutchinson is the author of "Great Conservatives" (Academica Press, 2005). Details can be found on the Web site www.greatconservatives.com
 
Doctor Doom
Commodities Will Crawl In 2010

Nouriel Roubini and Rachel Ziemba - 12.24.09
http://www.forbes.com/2009/12/23/oil-energy-commodities-opinions-columnists-nouriel-roubini.html

It's time we look at some of the trends that might move global energy markets in 2010. The OPEC meeting on Dec. 22, the first hosted by Angola, brought few surprises as countries pledged to maintain their current production cuts in the face of an uncertain global economic recovery. But as growth starts to pick up, could a combination of oil demand growth from emerging market economies and geopolitical supply vulnerabilities boost the oil price back to $100 per barrel--a level that could put the economic recovery in jeopardy?

Probably not. The oil market still seems over-supplied, given ample inventories, an increase in OPEC and non-OPEC production, and high surplus capacity within OPEC. This supply, and a weak global economic recovery, could mute some of the pressure on the oil price. Fundamentals do not always drive prices--one might expect an oil price closer to $50-55 per barrel today--but they can be restraints. In second-half 2009, the increase in the oil price was much more muted than the oil spike (and spike in base metals) in 2008. Oil prices rose rapidly in the spring of 2009, then traded in a relatively narrow band around $75 per barrel for most of the year.

With the U.S. Federal Reserve set to remain on hold--likely into 2011 in RGE's view--global liquidity conditions should be supportive of oil and other commodities. Any pressures on the U.S. dollar could strengthen oil. The fundamental outlook, however, could restrain this upward pressure.

The sharp fall in demand for oil in 2009 following a shallower decline in 2008 marked the first back-to-back oil and oil product demand declines in two decades. At the end of 2009, oil and product demand began to recover, but they remain well below 2006 and 2007 levels. The strong pace of growth in emerging market economies, particularly in Asia, suggests EM fuel demand will be strong, only partly offsetting weak demand in OECD economies, making the global rebound in demand more muted than in 2004-2007.

Despite the auto industry-focused nature of the fiscal stimulus in many countries--especially China--the incentive to buy more fuel-efficient cars suggests the growth in oil product demand will continue to be more muted than this buying surge would indicate. Moreover, with prices tied more closely to global market prices, more of a price increase would be passed on to the consumers in China. Other Asian countries have likewise poked holes in their subsidy regimes. Finally, the addition of refinery capacity in the Middle East and Asia removes one price pressure as the chance of product shortages are lower.

Demand in the U.S. improved from the very weak levels seen in late-2008 and early-2009 but remains well below the level of recent years. Inventories of oil and oil products are well below five-year average levels. Miles driven are estimated by the U.S. Department of Transportation to be at levels not seen since 2004. With gas prices higher, we may begin to see a consumption response.

There seems little shortage of supply in the near term. As oil prices stabilized around $70 per barrel in mid-year, output began increasing with both OPEC and non-OPEC countries increasing production. Despite an OPEC pledge to comply with past cuts and targets, a slow leak of increased production seems set to continue. As of November, aggregate compliance with the January 2009 cuts was at only 60%, down from the 80% seen in February and March 2009. The compliance with cuts varies dramatically across the GCC countries, with Saudi Arabia picking up the slack. Only a sharp drop in the oil price and demand would provoke much change. A slip in the oil price to the $60-per-barrel range would likely trigger renewed output cuts from both OPEC and non-OPEC members.

Non-OPEC output is also on the rise. Russia has boosted output, offsetting 2008 declines, and output from Canada and Brazil has also increased. These increases, at least in the near term, reinforce OPEC trends and suggest that supply will continue to outpace demand in 2010.

There are also some lurking geopolitical issues and higher security costs that could reduce oil supply on a temporary basis. Saudi Arabia is increasingly involved in Yemeni conflicts. Despite what many analysts call a proxy war with Iran, the effect on the oil supply seems limited. The resurgence of Iranian domestic opposition for the first time since the opposition was brutally suppressed in the summer of 2009 raises some uncertainties. Domestic politics and nuclear posturing suggest that foreign oil companies and expertise will be kept out of Iran for a longer period, deferring any output increase. Sanctions on Iran are tightening again.

OPEC surplus capacity (still about 4 million barrels per day) should mute some of the geopolitical pressure on the oil supply, especially when coupled with a generalized increase in production. Similarly, the increase in refineries to process GCC sour crude could reduce the impact of supply shortages on the global oil price.

Natural gas markets, which are regional, face some challenges in 2010. Last week, RGE's Jelena Vukotic highlighted the risk of a renewed gas crisis stemming from Ukraine as the cash-strapped government repeatedly struggles to pay its gas bill and refuses to pass on higher costs to domestic consumers. A year ago, Russia's Gazprom cut off gas supplies to Ukraine when it refused to pay its bills in full, and gas to the E.U. was reduced sharply. Given domestic political feuding in Ukraine, the chance of a repeat has risen. While Moscow will be reluctant to be seen as meddling in Ukraine's mid-January presidential elections, the country and its state-owned energy company Naftogaz seem to be running out of options. Funds from the IMF standby agreement are frozen following the approval of populist measures. The great recession has reduced natural gas demand in Europe, but it could be another cold winter, particularly for the countries in southeastern Europe which have few supply alternatives. Western Europe continues to have relatively ample natural gas supplies in storage.

The longer-term oil supply outlook does not look quite as good as it does today, a dynamic that elevates today's prices. In particular, the increase in output from Iraq and Russian and African oil frontiers may be slow to come. Yet here again, Saudi Arabia may be a major source of supply. After adding new supplies in 2008, it has put further development on hold, a decision that could be reversed.

Iraq recently extended servicing contracts to a number of fields and hopes to more than double oil output to 5 million barrels per day by midway through the next decade, offsetting other declining fields. It could wind up taking longer however--and the deteriorating security situation and lack of infrastructure makes some fields much less attractive. Only Sonangol, the Angolan owned company, was willing to bid on the two fields closest to the violence in Mosul.

Shell seems about to cut some of its losses in Nigeria, reportedly preparing to sell $5 billion in assets in the Niger Delta. As RGE's Lee Hudson Teslik noted last month, Nigerian production remains well below its 2006 peak and the costs of providing security are making operations less attractive.

Another source of uncertainty stems from environmental policy. More energy efficiency could reduce oil demand growth. Regulatory clarity, particularly surrounding anti-climate change policies, is key to future developments, not only of renewable energy technologies but also of hydrocarbons. Cleaner burning and ample natural gas could be attractive in efforts to reduce emissions. The political momentum may bring new energy-efficiency policies that could reduce demand for oil over time--something OPEC members are worried about.

Further development in Canada's oil sands is contingent not only on oil prices above $60 per barrel but also clarity about how Canadian bitumen will be treated in the U.S. The U.S. cap and trade bill will be reconsidered by the Senate in the spring 2010. The compromise at Copenhagen leads to little clarity on these issues, and horse trading may be as necessary for the Cap-and-Trade bill as for the health care legislation.

A strong and stable oil price could actually support efforts to diversify away from oil. A price of $75-80 a barrel not only unlocks a lot of new oil supply over a near-term perspective--including oil sands, pre-salt Brazilian oil, as well as appetite for Iraqi oil--but also makes a number of alternatives more viable.

On a macroeconomic basis, a gradual increase in the oil price can be more easily absorbed than a spike. However, even if $80 a barrel is a price that consumers and producers feel they can live with, such levels could still put a crimp on the global recovery as consumers spend more on fuel, particularly if rising headline inflation prompts central banks to start tightening interest rates, given the higher share of food and fuel in consumer baskets.

Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics (RGE), is a weekly columnist for Forbes. (Read all of his columns here.) Rachel Ziemba is a senior research analyst at RGE for China and oil-exporting economies.
 
December 23, 2009

Atlas Iron Has A Lot To Show For Five Years Work

By Rob Davies
www.minesite.com/aus.html

David Flanagan, managing director of Atlas Iron, can rightly claim to have brought the company a long way in the five years since he launched it. Then it had one employee, him, today it has hundreds and has just completed shipping its first million tonnes of iron ore to China. A A$700million market cap company is good going in that time frame.

You could argue that he has been lucky. But he didn’t set out to develop an iron ore company. Like any good shop keeper he went with the flow of business and tested every tenement for any conceivable value. The fact that iron ore prices doubled twice in the company’s first years of life, and he had a 50 metre intersection of 60 per cent iron ore 10 km from a highway, was a pretty good sign of the direction to take the company in.

Iron ore mining is normally a business for the big boys because of the huge capital costs and logistical exercise of building and running iron ore mines. David’s approach has been to focus on small, high grade deposits close to infrastructure where he can exploit direct shipping ore. Moreover, he has dodged the lengthy process of getting definitive feasibility studies costing millions of dollars that banks require before they even climb into a first class airline seat. Keeping his company free of debt and financing everything through equity has short circuited the usual multi-year development route and allowed Atlas to get in production while prices are still high and rising.

David points out that it only cost A$18million to bring Pardoo, the company’s first mine, into production. Although as a mining minnow Atlas is a price taker, A$75 a tonne FOB is not bad for something that costs A$40 to put into the ship. Even if that involves using 107 tonne road trains over the 75 kilometres to Port Hedland from Pardoo. This mine will be expanded to 3 million tonnes/year at a cost of A$14.4million and will be complemented by new mines at Wodgina, Abydos and Mt Webster. Altogether these mines will have a production capacity of 12 million tonnes a year by 2012. Building them will absorb all the A$140million it currently has in the bank but it will be cash flow positive on an operating basis for the year to June 2010.

That growth, though, is only part of the story. Atlas has made 32 acquisitions in its short life and the most recent was a merger with Warwick Resources that gives it access to much larger resources to the south. In the meantime David is working on bringing a partner into its Ridley magnetite deposit at Pardoo. A sale of a strategic stake in that could raise hundreds of millions of dollars which could be used for further expansion. One to watch in 2010.

Iron ore mining is very different from base and precious metal mining as there is no terminal market. Atlas has four rolling three year contracts in place, one at benchmark prices and the other three on a hybrid of benchmark and spot. While no one knows what the future holds David is relaxed. He doesn’t disagree with the forecasts from Jim Lennon of Macquarie that prices could rise 10 to 30 per cent next year. He points out that China produces half the world’s iron ore, all at a higher cost than he can produce it for. If cutbacks have to be made because of weaker prices it won’t be in the Pilbara. Atlas look as well placed as any company to benefit directly from China’s insatiable demand for resources.
 
December 29, 2009

That Was The Year That Was … In Australia


By Our Man In Oz
www.minesite.com/aus.html

What global financial crisis? That was the view from Australia in 2009, a year when Europe and the U.S. hit a brick wall, and Australia was scratched by one or two falling bricks. Technically, there was not even a recession in Oz with no consecutive quarterly economic growth data dipping into the negative and unemployment, which the Australian Government’s budget as recently as May had tipped to hit 8.5 per cent appearing to have peaked at 5.7 per cent in November, and now falling.

On the market, the metals index soared up by 42 per cent in calendar 2009. The all ordinaries added 29 per cent, and the gold index, weighed down by a sharply higher exchange rate, crept up by 14 per cent. Among explorers and smaller miners some share price performances were simply stunning with a new Minesite member, Sandfire Resources, the star thanks to a rise of 8600 per cent between March 12 and October 16 when the stock rocketed up from A5 cents to a peak for the year of A$4.39 thanks to its copper discovery at Doolgunna in Western Australia.

Four factors saved Oz. They are a simple economy, which does not compete with China, but exports commodities to China and other Asian countries. Worldwide government stimulus spending which replaced private sector buying of commodities. The slide in value of the U.S. dollar which elevated demand for commodities, and a banking system which had been kept on a tight leash by government regulators in the good years, and which has kept lending through the bad.

Looking back to the start of 2009 and it felt a lot different. Like London, the air in Australia was thick with the smell of fear and loathing as everyone waited to see what the collapse of Lehman Brothers, and other banks, would do to world trade. Some companies suffered. Rio Tinto was the primary victim thanks to its astonishingly ill-timed acquisition of the Canadian aluminium producer Alcan. OZ Minerals also got the timing of its debt commitments completely wrong.

Look back now and both Rio Tinto and OZ have survived, albeit in diminished form and with management reputations in tatters. Chinese demand for iron ore saved Rio Tinto, first by making it a takeover target for China Incorporated, and then as a “merger” partner with BHP Billiton. OZ survived because its best asset, the Prominent Hill copper and gold mine, is located in an old British nuclear weapons testing zone at Woomera and the Australian Government banned a proposed Chinese takeover. Not many companies (or people) can say they have been saved by the bomb.

Other major issues in Australian mining in 2009 included:

The relatively poor performance of the domestic gold sector thanks to currency movements. Rather than rise, as it did everywhere else, the Australian dollar gold price fell 1 per cent from A$1,248 an ounce at the start of the year to A$1235/oz. The best of the Aussie gold stocks were those operating in West Africa, such as Perseus, Adamus, Gryphon, Azumah, and Resolute.
Tough times in the nickel sector with high-grade miners, such as Mincor, Panoramic and Independence, surviving thanks to the 3 per cent-plus ore found around the historic Kambalda Dome, offset by the mothballing by BHP Billiton of its US$3 billion Ravensthorpe laterite mine which has just been sold to Canada’s First Quantum for $US340 million – which will prove to be the bargain of the decade, or another case of death by laterite.
An unexpectedly strong performance by iron ore stocks thanks to China allocating much of its massive economic stimulus spending to infrastructure spending on railways, airports, roads and bridges. While China managed to screw down prices this year, and the high Aussie dollar added to the pain, there is a strong belief that prices will regain lost ground in 2010. Fortescue Metals has been the big winner from high iron ore demand, followed by Atlas Iron, Mt Gibson and Murchison Metals, which led the small end of the sector, and with new players such as Iron Ore Holdings getting set for stronger demand and a possible opening up of rail and port systems which have hampered small exporters for decades.
A dramatic increase in Asian demand for all forms of Australian energy, led by coal, uranium and natural gas. The coal boom, illustrated as recently as this week by Macarthur Coal’s proposed takeover of Gloucester Coal, has been the bane of the environmental movement. Some of the best performing stocks at the upper end of the market were coal companies, and a recent comparison of coal miners with developers of renewable energy projects showed a clear win for coal.
A second near-miss for the Australian economy when a carbon emissions trading scheme (which is actually nothing but a tax on energy-intensive industries) failed to pass through Parliament. That loss came days before a second big defeat for the Australian Government which is trying to market itself as having deep green roots. Just how green was on display at the shambolic Copenhagen climate change conference to which Australia sent a delegation bigger than that from Britain, only to achieve nothing.
A call of the sector-by-sector card puts iron ore as a clear leader of Australian mining in 2009, followed by copper and coal. Gold struggled against the currency which ended the year 27 per cent higher against the U.S. dollar, partly a result of the U.S. dollar declining and a flow of hot money into Australia as a proxy for Asia, and partly as a re-start of carry trade investors chasing high interest-rate currencies.

At the small end of the market five of the top 10 Australian stocks were miners. Sandfire topped the chart, but was followed by a group of little-known explorers, with modest market values, including:

Alchemy Resources, up from A4 cents to a peak of A$1.27 (3075 per cent), and now back to around A67 cents. Its major interest is a package of tenements close to Sandfire’s Doolgunna copper discovery. A classic case of “near-ology” which might, or might not, bear fruit. At its current price the stock is capitalised at A$44 million.
Northern Mining, up from A1.2 cents to a high of A29 cents (2316 per cent), but now back around A24 cents. Northern is a mixed-bag explorer with gold, iron ore, copper and uranium targets, plus a nickel project in Poland. Currently capitalised at A$37 million.
Western Desert Resources, up from A5.1 cents to a high of A90 cents (up 1664 per cent), and now trading around A47 cents. It is exploring the Roper Bar iron ore project in the Northern Territory and has a gold tenement near Tennant Creek. Currently capitalised at A$50 million.
Emergent Resources, up from a low of A7 cents to a high of A$1.06 (1414 per cent) thanks to interest in its Beyondie iron ore project. It is now trading around A75 cents, which means it has retained its 10-bag claim to fame (a 10-times price increase). Currently capitalised at A$30 million.
Spectacular share price moves like those were commonplace during the second half of 2009 at the small end of the market, and while percentage rises off a low base always look good, they are not what you expect to see if an economy is in recession.

It was a similar, but more subdued market at the top end, where only one of the top 20 listed mining stocks ended the year down. The loser was Australia’s biggest gold producer, Newcrest Mining, which opened 2009 at A$34.48, a price driven back then by the rising U.S. dollar gold and the falling Australian dollar which produced an all-time record Aussie gold price A$1550/oz.

Among the best performers at the top end were: Fortescue (iron ore), from A$1.96 at the start of 2009 to A$4.36 this week. Aquila (coal and iron ore), A$3 to A$9.43, Centamin (gold), A94 cents to A$2.17. Mt Gibson (iron ore) A44.5 cents to A$1.55. Equinox (copper) A$1.60 to A$4.23. Kingsgate (gold) A$3.50 to A$8.50, and Murchison Metals A65 cents to A$2.29.

Boiled down, if 2009 was a recession year, then there are a lot of Australian investors doing an Oliver Twist impersonation right now – “please sir, can I have some more”.

With that, it’s Happy New Year from Minesite’s Man in Oz who is heading to the fridge for a cold beer.

ps: enjoy the Ashes while you’ve got them!
 
Stocks will drop sharply, Pimco’s CEO predicts
December 28, 2009

NEW YORK - Homes are selling at their fastest clip in nearly three years, the unemployment rate is falling, and stocks are up 66 percent since their March lows - the best performance since the 1930s. What’s not to like?

Plenty, says Mohamed El-Erian, chief executive of the giant bond manager Pimco. The recovery may be gaining steam but is no different than a kid who eats too much candy, he says. “We’re on a sugar high,’’ El-Erian says. “It feels good for a while but is unsustainable.’’ His point: This burst of economic activity fed by government spending and near-zero interest rates will soon peter out.

El-Erian oversees nearly $1 trillion in assets. What he’s saying:

■Stocks will drop 10 percent in the space of three or four weeks, though he’s not predicting when.

■The unemployment rate will be hovering above 8 percent a year from now.

■US gross domestic product will grow at an average of 2 percent or so for years - a third slower than we’re used to.

El-Erian says people are fooling themselves if they think all the bullish data of late mean a strong recovery is in the offing. So he’s buying Treasurys and selling riskier stuff. His bet: Investors will get scared again and want US-guaranteed debt.

Investors betting on stocks or high-yield bonds are apt to be disappointed, he says.

Markets for those securities are rallying not because people like them but because they hate the puny yields of safer investments like money markets and feel they have no choice but to buy, he says. That makes the bull market as likely to last as a forced marriage, he quips.

The danger: If stock and junk bond prices start falling, lots of investors are likely to bail, feeding the drop.

Of course, there are true believers in the bull who are not buying El-Erian’s line.

James Paulsen, chief strategist at Wells Capital Management in Minneapolis, with $355 billion under management, has been pounding the table for months to buy stocks. Just as in the early 1980s, the recovery will take the form of a “V,’’ he says. The reason: Companies have cut inventories and payrolls to the bone, so just a little revenue growth could yield a bumper crop of profits.

El-Erian says many of the bulls don’t appreciate just how much the government props still under the economy are masking its weakness. Instead of focusing on the fundamentals today, he says, they’re looking to the past, expecting a quick economic rebound because that’s what’s happened before.

We’re trained to think the “farther you fall, the higher you’ll bounce back,’’ El-Erian says. “We’re hostage to the V.’’

Source >> http://www.boston.com/business/mark...stocks_will_drop_sharply_pimcos_ceo_predicts/
 
Next Decade Will Be Good One for Stock Investors
Commentary by Matthew Lynn

Dec. 29 (Bloomberg) -- Even the most practiced soothsayer will struggle to make any detailed predictions for the next 10 years. It’s hard enough to know what will happen in the markets in January 2010, never mind December 2019.

The main thing investors need to know about the coming decade can be summed up in one of those pithy Twitter updates. Will it be good or bad for stocks? Everything else is extraneous.

The answer? Good. A shortage of capital from any source other than the stock market; moderate but persistent inflation; and the probability that economic growth will be stronger than many economists expect means that “the 10s” will be a time when equities start to have some rocket fuel in their engine again.

Stock markets usually work in decade-long cycles.

The “noughties” were bad for shares. Most of the major markets didn’t manage to make any progress at all over the course of the whole 10 years. The U.K.’s FTSE-100 index, for example, hit a record of 6,930 in December 1999. A decade on, it is now at about 5,300. Likewise, Germany’s DAX index passed 8,000 in March 2000, but is slightly less than 6,000 now. It doesn’t make much difference what benchmark you look at. A few emerging markets aside, they all had a dismal decade.

Leaving aside the simplistic point that every run of under- performance by any asset class usually comes to an end sometime, there are three solid reasons for thinking that this decade will be a lot better for stocks than the last one.

Capital Shortage

First, there will be a shortage of capital.

One reason why equities performed so miserably during the last decade was that companies, and their chief executives in particular, really didn’t need shareholders very much. Remember, a stock market is just a place where you can raise money for building new factories, shops or warehouses. But in the last decade, if you needed cash, there were lots of people who would give it to you: a bank, the bond market or a private-equity firm. So why bother looking after a lot of irritating shareholders when you didn’t really need anything from them?

In the coming decade, that will change. Capital will be in far shorter supply. The only place many companies will be able to raise money will be in the equity markets. The result? Companies will have to make sure their shareholders are being well looked after -- and that means steady dividends and a rising share price. Or else there won’t be much point in asking them for more money.

Rising Prices

Next, inflation.

There are plenty of people out there -- most of them gold enthusiasts -- predicting hyperinflation. That might happen eventually, if central banks keep printing money like crazy. There is another stage to get through first: moderate, persistent inflation in the 5 percent to 6 percent range.

That’s pretty good for equities. The big, multinational companies that dominate the main indexes can usually lift their prices along with the inflation rate. So long as they can do that, they can keep profits and dividends ticking over nicely, roughly in line with price gains.

In that scenario, equities will be one of the few asset classes that can be depended upon to keep up with inflation. Even better, they should get an additional boost as investors switch their money out of bonds -- which get hammered by inflation -- to protect themselves against price increases.

Economic Spurs

Finally, there will be a growth surprise.

Given that we have just been through the worst financial crisis of the last half-century, people are pretty gloomy about the global economy right now. And, in fairness, there is plenty to worry about: a damaged banking system, the demise of the dollar, and huge government deficits.

Even so, let’s maintain some perspective. Earlier generations overcame famines, plagues and world wars, so a few dodgy banks and some deficits hardly seem that bad.

The chances are that growth in the new decade will give us a pleasant surprise. There are plenty of reasons to be optimistic. As Zurich-based UBS AG said in a recent research note to investors, global population in the next three to four decades will grow by about 3 billion, mostly in the emerging markets where incomes and consumption are rising rapidly. That will act as a powerful spur to the global economy, even if it will put a huge strain on the environment.

The developed economies have big potential to increase the number of people in the work force if they overhaul their welfare systems. The looming fiscal crunch might well be the trigger for finally making that happen. That, too, would be an economic boost.

And technology, the main driver of innovation and progress, shows no sign of slowing down. If anything, with so many more smart people being born, it should speed up. That’s another reason growth should accelerate.

Of course, there will be plenty of choppy economic water ahead. Some more banks may crash, the dollar might implode, and a war or two might be fought. Even so, the stage is set for a great decade for shares. The FTSE, the DAX and the other global benchmarks should end 2019 higher than they started in 2010.

Source >> http://www.bloomberg.com/apps/news?pid=20601039&sid=ad7L3gw_8wB8#
 
Kass: Squawking About the Headwinds
Doug Kass, 12/30/09

On Monday morning I appeared as guest host on CNBC's "Squawk Box," marking the sixth year I have guest-hosted the morning show. With Becky Quick on vacation, it was the three amigos: Carl Quintinilla, Joe Kernen and myself.

Here is a synopsis of some of my remarks, a summary of my surprises for 2010 and some of my other comments from the show.

Already, this week, one of my Surprises seems to have occurred. Surprise No. 16 was that one of the largest and most successful hedge funds would be troubled by legal issues. Indeed, yesterday The Wall Street Journal reported that hedge fund Harbinger Capital Partners has been accused of receiving inside information in a takeover bid several years ago.

Back to the markets.

The Steady Advance in Worldwide Equities Continues
This week the risk trade remained on, despite protests from some quarters (e.g., The Edge). The equity markets continued their ascent this week, marking six consecutive days of improving share prices. (We have to go all the way back to April 2007 to have seen a seven-day skein.) And assuming stability over the next two trading days, the Nasdaq's December rise will likely be the best since the bubble days of December 1999!

N's (Nasdaq) continue to trump S's (S&P 500 Index), as the Four Horsemen of the Nasdaq picked up some additional Wall Street endorsements. Henry Blodgett-like price target raises for Google (GOOG) and Amazon (AMZN) are starting to make it look a lot like Christmas 1999 (!) as those shares continue to be buoyed by the sponsorship of momentum players (and other long-term believers).

Pay Heed to Gilda

"It's always something."
-- Rosanne Rosanna Danna (Gilda Radner), Saturday Night Live

Meanwhile, crude prices are challenging $80 a barrel.

Fixed income has been pressured (and so has the U.S. dollar this week), while the yield on the 10-year U.S. note rose to a cycle peak of nearly 3.85% on Tuesday. With the future cost of servicing public policy moving ever higher, this represents a developing headwind to confidence and economic growth and, in the fullness of time, maybe even corporate profits. But, as lynx-eyed Jason Trennert of Strategas Research Partners noted on "Squawk," investors for now are ignoring the accumulating due bills.


Another New Paradigm?
As I opined on Monday's "Squawk Box," disbelief and doubt have been suspended and driven from Wall Street as the clustered consensus forecast of 2010 corporate profit growth of 25%+, GDP growth of 4%, tame inflation and contained interest rates have supported the bullish view of a self-sustaining economic recovery (even capable of an historically normal 40+ months' lifespan), and that view has gained more adherents.

While it is fortunate that equities as a class are not stretched in valuation to the degree of past cycles (e.g., 1999-2000) or like other asset classes (e.g., private equity, commodities and residential and nonresidential realty prices), the developing bullish view of uninterrupted growth has a tinge of another new paradigm to it.

I continue to believe that the consensus outlook remains among the more likely economic outcomes next year -- perhaps even the most probable outcome. But where I stray is that 1) there exists (owing to cyclical, secular and nontraditional influences) a number of less benign outcomes that have a reasonable chance of occurring and 2) markets might have materially moved to discount consensus and optimistic expectations.


The Short Tail of Cyclical Headwinds
While most already recognize that the 2010 economic recovery will be shallow by historic standards, consensus economic and corporate profit forecasts are on the ascent and growing ever more optimistic, perhaps following the rise in worldwide stock prices. A still-challenged consumer, structural joblessness, the prospects for potentially higher interest rates (and cost of capital) associated with the difficulty in engineering a smooth transition in fiscal and monetary policy, a large phantom inventory of unsold homes, the still-hesitant lending activity at our leading banks (which have faced a decimation in their capital bases) and the costs of new regulatory burdens (e.g., health care) remain among the many shorter-term threats to the consensus' benign forecast.


The Long Tail of Populism
Importantly, as I underscored on "Squawk Box," there is an angry subtext -- the average American resents some of our largest institutions (especially of a financial kind), our politicians (Republicans and Democrats alike) and the wealthy. We face, as a result, a tidal wave of populism, which will become a major investment theme into 2010-11.

The attitude toward big business and the wealthy has rarely been this bad. When the policies of populism (higher taxes and more costly regulation) are mixed with a number of other nontraditional headwinds (municipalities' disarray, a still-wounded lending mechanism, etc.), the trajectory of economic growth will almost certainly be stunted. These two factors -- public policy that grows from populism, nontraditional headwinds -- form a potentially toxic cocktail, especially within the context of the size of the market rally of the last eight months.


A Keynesian Hangover Lies Ahead

"As we move into 2010, no doubt the horns will be blowing for the long-awaited U-shaped recovery. I suspect it won't be long before we realize we've drunk too much, and that the second dip of a W-shaped recession awaits us."
-- Benn Steil, Wall Street Journal Op-Ed
Regardless of the logic surrounding my many concerns and my increasingly minority view that a Keynesian hangover lies ahead, the crowd continues to appear to outsmart the remnants, and there appears for now to be no place for a variant and negative view. (Unlike Gary "The Count" Dvorchak, I am steadfast in the notion that it is different this time.) With such a euphoric backdrop, warning signs and potential threats are dismissed as de minimis to the bigger picture (e.g., more tentative economic signals, still-sluggish residential real estate markets, rising interest rates, moribund consumer confidence, emerging geopolitical tension, etc.)

In summary, the worldwide bull market (which, as Dennis Gartman so clearly cites in his commentary, produces a stock market chart line that moves rather convincingly from the lower left to the upper right!) remains intact while skepticism remains in its own well-defined downtrend and bear market.

But, baby, it's cold outside ... and for me, tactically, on my trading desk, inside as well! But as Scarlett O'Hara (Vivien Leigh) reminded us many years ago in Gone With the Wind, "After all ... tomorrow is another day."

My Grandma Koufax used to put extended stock market rallies into perspective (and in even more vivid prose!) when she said to me, "Dougie, it's getting too easy. Watch your tush!"
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Source >> http://www.thestreet.com/print/story/10654084.html
 
January 02, 2010

Last Days Of Trading In 2009 Went Very Well Down Under

By Our Man In Oz
www.minesite.com/aus.html

Minews. Good morning Australia, and happy new year. How did your market end 2009?

Oz. Strongly, is the one word answer. The final seven trading days, spread over two weeks before and after Christmas, saw the metal and mining sector rise by almost 1 per cent a day. When the final bell rang at lunchtime on Thursday the mining sector had gained 5.8 per cent since December 18, and 48.6 per cent since the start of 2009. Those gains by the pure mining stocks were comfortably ahead of the overall market with the all ordinaries index up by 4.4 per cent in the final two weeks and 27.6 per cent for the year.

Minews. Results which would seem to emphasise the dominant role of resources in the Australian economy. I have to point out, however, that the Mining Sector of the FTSE Index in London recorded an advance of no less than 108.11 per cent over 2009.

Oz. Fair enough, but a lot of your resource stocks fell much further than ours in 2008 and it has been mining and natural gas which has led Australia safely through the global downturn, and which seem certain to lead future growth. As we’ve discussed before, Australia is not competing with China and India in the manufacture of goods and services, like Europe and the U.S. We are selling raw, and partly processed, materials to those two fast-growing countries, as well as the other Asian tiger economies, Japan, Korea, and Taiwan.

Minews. Time for prices, and let’s keep it quick this week, so we can ease our way into 2010.

Oz. Before we get to prices it’s worth mentioning a few newsworthy items about events which might colour the market over the next few weeks. First, there is the change we’re seeing in currency values as the U.S. dollars regains lost strength. This will have a significant effect on the earnings of Australian miners if it continues. A few weeks ago we appeared to be heading for parity, before slipping from close to US94 cents to around US89 cents in the final hours of 2009.

Commodity prices are also a hot topic among the miners, none more so than iron ore and coal. After copping a big price cut in 2009, coupled with losses on currency conversion, the tables are turned once more. Australian iron ore exporters seem certain to win a price rise of between 20-and-30 per cent this year, and might even have a currency win to boost the increase. That’s why the strongest sector over the past two weeks on the Australian market was iron ore, followed by a return of interest in base metals, especially zinc and copper.

Minews. Let’s start the price call with iron ore.

Oz. All up, bar one, was how iron ore stocks finished 2009. The one fall was the Norwegian magnetite hopeful, Northern Iron (NFE), which lost A12 cents to A$1.22, as it struggles to achieve volume and quality targets at its Sydvaranger project. Better news came from Gindalbie (GBG) which added A9 cents to A$1.06 as it made brisk progress on construction of its Karara magnetite mine in Western Australia. Giralia (GIR), which has high hopes for its Mt Webber project, gained A18 cents to A$1.45, just short of its 12-month high reached in early December. Atlas (AGO) added A8 cents to A$1.88. Brockman (BRM) was up A36 cents to A$2.44. BC Iron (BCI) rose by A7 cents to A$1.18, and Fortescue (FMG) ended the year at A$4.46, up A20 cents in the final two weeks, thanks in part to the not guilty verdict in a long-running court case taken by corporate regulators against the company and its chief executive, Andrew Forrest.

Minews. Base metals now please, if they’re starting to look interesting.

Oz. They are, with both copper and zinc stocks benefitting from the rise in the price of both metals. Sandfire was among the copper companies to benefit, adding A41 cents to A$3.74, despite publicity surrounding the sudden departure of co-founder and chairman, Miles Kennedy, and the prospect of a divisive shareholders meeting in the next few weeks to approve a cash payout. Talisman (TLM), which is exploring on ground adjacent to Sandfire, rose by A19 cents to A$1.01. Citadel (CGG) regained lost ground to close the year at A37.5 cents, up A2.5 cents. Equinox (EQN) added A25 cents to A4.34, and Hillgrove (HGO) continued to win support for its decision to proceed with the re-development of its Kanmantoo project, rising by A3.5 cents to A42.5 cents.

Zinc is shaping as the surprise packet in the early weeks of 2010 with a deal involving CBH’s Endeavour mine likely to be announced as early as Monday. Nyrstar, the company which grew out of the failed Pasminco, is believed to be preparing an offer for the mine, not that this moved the market last week with CBH closing steady at A10 cents. It was a better performance by Perilya (PEM) which added A8 cents to A67 cents and Terramin (TZN) which gained A6.5 cents to A81.5 cents.

Nickel stocks also benefited from the combination of a rising metal price and a falling Australian dollar. Mincor (MCR) closed the year A5 cents higher at A$1.79. Independence added A13 cents to A$4.90. Panoramic (PAN) was up by A10 cents to A$2.34 and Minara (MRE) rose A8 cents to A81 cents.

Minews. Gold, uranium, coal, now please.

Oz. Gold stocks were up, but modestly, with the lower U.S. dollar gold price rubbing the gloss off the sector, offset only a little by the fall in the value of the Australian currency. Kingsgate (KCN) led the way up, adding A69 cents to A$9.19. Troy (TRY) rose by A10 cents to A$2.40. Perseus (PRU) put on A2 cents to A$1.76, and Silver Lake (SLR) crept A1 cent higher to A$1.05. Stocks to fall included Resolute (RSG) which eased back by A3 cents to A$1.04. Chalice (CHN), slipped A1 cent lower to A44 cents, while Cortona (CRC) and Allied (ALD) lost half-a-cent each to close at A14 cents and A32.5 cents respectively.

Mantra (MRU) was strongest of the uranium stocks with a rise of A49 cents to A$4.65, and Manhattan added A7 cents to A$1.27. Those gains were offset by Extract (EXT) slipping A2 cents lower to A$8.48 and Forte (FTE) easing back by half-a-cent to A14 cents.

Coal stocks all benefited from the higher oil price and the proposed takeover of Gloucester Coal (GCL) by Macarthur Coal (MCC). On the market, Macarthur shot up by A$1.73 to A$11.13, and Gloucester gained A$2.61 to A$9.11. Centennial put on A31 cents to A$4. Coal of Africa (CZA) added A7 cents to A$1.91 and Stanmore Coal (SMR), one of the final floats of 2009, was rushed by eager buyers, adding A32 cents to close at A75 cents.

Minews. Any specials worth reporting.

Oz. Only one. Venture Minerals (VMS) which took a look at couple of weeks ago, has started to gain traction, rising by A7.5 cents to A37.5 cents thanks to its tin and tungsten project in Tasmania.

Minews. Thanks Oz. You can go to the beach now. I’m off snowballing.
 
Blackstone Group's Byron Wien Announces Top Ten Surprises for 2010

NEW YORK--(BUSINESS WIRE / January 4, 2010)--Byron R. Wien, Vice Chairman, Blackstone Advisory Services, today issued his list of the Ten Surprises for 2010. This is the 25th year Byron has given his predictions of a number of economic, financial market and political surprises for the coming year. He started the tradition in 1986 when he was the Chief U.S. Investment Strategist at Morgan Stanley. Byron Wien[He is my favorite forecaster] joined The Blackstone Group in September 2009 as a senior advisor to both the Firm and its clients in analyzing economic, political, market and social trends.

The Surprises of 2010

1. The United States economy grows at a stronger than expected 5% real rate during the year and the unemployment level drops below 9%. Exports, inventory building and technology spending lead the way. Standard and Poor’s 500 operating earnings come in above $80

2. The Federal Reserve decides the economy is strong enough for them to move away from zero interest rate policy. In a series of successive hikes beginning in the second quarter the Federal funds rate reaches 2% by year-end

3. Heavy borrowing by the U.S. Treasury and some reluctance by foreign central banks to keep buying notes and bonds drives the yield on the 10-year Treasury above 5.5%. Banks loan more to corporations and individuals and pull away from the carry trade, thereby reducing demand for Treasuries. Obama says, “The suits are finally listening”

4. In a roller coaster year the Standard and Poor’s 500 rallies to 1300 in the first half and then runs out of steam and declines to 1000, ending where it started at 1115.10. Even though the economy is strong and earnings exceed expectations, rising interest rates and full valuations present a problem. Concern about longer term growth and obligations to reduce leverage at both the public and private level unsettle investors

5. Because it is significantly undervalued on a purchasing power parity basis, the dollar rallies against the yen and the euro. It exceeds 100 on the yen and the euro drops below $1.30 as the long slide of the greenback is interrupted. Longer term prospects remain uncertain

6. Japan stands out as the best performing major industrialized market in the world as its currency weakens and its exports improve. Investors focus on the attractive valuations of dozens of medium sized companies in a market selling at one quarter of its 1989 high. The Nikkei 225 rises above 12,000

7. Believing he must be a leader in climate control initiatives, President Obama endorses legislation favorable for nuclear power development. Arguing that going nuclear is essential for the environment, will create jobs and reduce costs, Congress passes bills providing loans and subsidies for new plants, the first since 1979. Coal accounts for about 50% of electrical power generation, and Obama wants to reduce that to 25% by 2020

8. The improvement in the U.S. economy energizes the Obama administration. The White House undergoes some reorganization and regains its momentum. In the November Congressional election the Democrats only lose 20 seats, much less than expected

9. When it finally passes, financial service legislation, like the health care bill, proves to be softer on the industry than originally feared. There is greater consumer protection, more transparency, tighter restriction of leverage and increased scrutiny of derivatives, but the regulatory changes for investment bankers and hedge funds are not onerous. Trading volume and merger activity increases; financial service stocks become exceptional performers in the U.S. market

10. Civil unrest in Iran reaches a crescendo. Ayatollah Khameini pushes out Mahmoud Ahmadinejad in favor of a more public relations adept leader. Economic improvement becomes the key issue and anti-Israel rhetoric subsides. Talks with the U.S. and Europe begin but the country remains a nuclear threat. Pakistan becomes the hotspot in the region because of the weak government there, anti-American sentiment, active terrorist groups and concerns about the security of the country’s nuclear arsenal
 
January 04, 2010

Front-running The Anticipation Of Higher Metal Prices In 2010

By Rob Davies
www.minesite.com/aus.html

Successful investing is about what happens next more than focussing too much on what has just transpired. Even so, it is always useful to know how we got to where we are and what the state of play is. In base metals the massive 90 per cent bounce from the cyclical lows a year ago is unprecedented in recent times. To put it into perspective it is more than twice as much as the recoveries in 1976 and 1983. Starting from such a high level already means further progress is going to be hard to achieve. Nevertheless, the two reasons for current prices are not about to change. Amazingly low inventory levels and astronomic amounts of monetary stimulus from governments of all persuasions and locations provided the rocket fuel for the rally. The transition of dumping the first stage, state stimulus and low interest rates, to the second stage of growing industrial demand could yet be a tricky one.

It is already clear that governments everywhere are less worried about inflation than unemployed voters, even where they don’t have democracies. No central bank governor or Finance Minister wants to turn off the life support machine of free money just to see if the patient can live without it. The risks are too great so the authorities will err on the side of caution. Overall, that is probably better news for precious metals than base metals, but the whole sector should benefit. Far more experienced commentators than this one will give their views on when interest rates will rise.

When official rates do go up the markets will doubtless react badly. However, they should not be surprised because longer term rates, as set by the market not politicians, are already rising. All we can assume as observers is that policymakers will withdraw the life support mechanisms in an orderly fashion so as not to upset the horses of commerce. In the absence of any policy shocks prices will therefore be dictated by demand, supply and the utilisation of inventories.

According to the commodity team at RBS headed by the effervescent Nick Moore the world economy is forecast to grow at the steamy pace of 4.1 per cent in 2010. Bearing in mind that last year’s economic contraction of 0.6 per cent was enough to send global crude steel capacity utilisation rates from 95 per cent to 65 per cent, according to GFMS, the impact of a recovery on this scale should be dramatic. True enough the experts at RBS are predicting some sharp increases in metal demand on the back of this. Aluminium and nickel consumption, for example, are both forecast to rise by 10 per cent. Copper is expected to have a more subdued, but still respectable, recovery with demand expanding at a rate of 6 per cent. Zinc demand is forecast to outperform lead, its constant companion, with a forecast growth of 8.8 per cent against 5.5 per cent for the heavier metal.

There are many uncertainties to those forecasts, not least that of world growth which is usually the biggest unknown. This year though the largest variable is likely to be that of the producers. Seeing prices at these elevated levels requires an enormous amount of resolve by miners to say, no I am not going to reopen capacity just yet. Reactivating capacity in response to higher prices is much riskier than reopening plant in the face of higher demand. The danger is that the additional supply overwhelms the financial, rather than the commercial, holders of the metal and they sell into the weakness and exacerbate the fall. Demand led reactivation is much more soundly based and has the potential to underpin a solid recovery.

A fascinating chart in the RBS study details how much capacity is currently shutdown and how much has been reopened. Nickel is the metal with most capacity currently idled with about 20 per cent of the industry out of action. Even so, 2 or 3 per cent has already restarted in response to higher prices. Aluminium producers have been the most enthusiastic about reopening plant. About half of the 20 per cent of mothballed capacity has already been restarted. Zinc and lead are around the 10% level and demonstrating the much sounder fundamentals these metals enjoy. Zinc smelters have already taken action to fire up about 5 per cent of the capacity that was closed. There is no doubting though that copper is streets ahead in having little idled capacity waiting in the wings. Only 5 per cent of mine supply and 10 per cent of smelter capacity has been shutdown in the crisis and not much has been restarted.

Given the low level of stocks, healthy demand outlook and only modest amounts of spare capacity the outlook for base metals cannot be anything other than rosy. Trouble is that is already widely known and is why prices have rebounded so far already. In that sense the metals have already discounted the recovery and all the good news is now in the price. In such an environment the market is vulnerable to bad news that upsets the consensus. It is this logic that makes the team at RBS fairly cautious about the outlook for prices in 2010. In terms of year on year gains the numbers look favourable, but compared to current spot prices the arguments looks less exciting.

Aluminium is forecast to rise 32 per cent on a yearly average basis to US$2,200 a tonne. That estimate is 10 per cent higher than the bank’s previous one, but is exactly the same as the current spot price. Copper is forecast to have a similar story and the bank has not changed its price forecast. A 31 per cent increase in the yearly average to US$6,750 a tonne and that is actually 8 per cent below the closing price for 2009. The story for nickel looks quite mundane. Its average price for 2010 is expected to be US$14,750 a tonne, only 1 per cent more than last year and 20per cent below the year end quote. Indeed, the new forecast from RBS is actually 5 per cent less than its previous one. Lead and zinc usually move in tandem and that remains the case. Lead is expected to be 31 per cent higher on average in 2010 than 2009 and zinc 20 per cent higher and these estimates have not been revised. In both cases though, the spot prices are above the estimates for the year. While lead is currently US$2,390 it is forecast to average US$2,250 for the year. In the case of zinc its current price of US$2,569 is 23 per cent above the forecast US$1,975 for the year.

The outlook then for base metals is bright. But the market already knows that so making money from the sector might be much harder in 2010 than in 2009. The easy money has probably already been made.
 
January 05, 2010

Mincor’s Mr Moore Goes Fishing, And That’s Good News For Mining In Australia

By Our Man in Oz
www.minesite.com/aus.html

Proper British fortune tellers use tea leaves to foretell the future, in much the same way the early Romans used sheep entrails. In the Australian mining industry there is an equally effective way of predicting what’s ahead, but before we reveal the technique, we must just state that the result represents good news for 2010. So, why is Minesite’s Man in Oz confident about the future? Because David Moore has taken a long holiday!

This discovery, which has nothing to do with what, or how much, Minesite’s Man was drinking over Christmas, has method in its madness. David is chief executive of Mincor, a nickel specialist with exploration fingers in other metallic pies. It has been largely through his guidance that Mincor has racked up 10 remarkably successful years, and ridden out, almost seamlessly, the great unpleasantness which started in 2008.

Mincor without Moore at the helm is almost unthinkable, so it came as an enormous surprise just before Christmas to discover that the man himself has taken a six-week break, and when you think about it, that is an extremely positive indication that he reckons the worst is over, and that now is a perfect time to get ready for the next upward leg in the resources sector.

There are a number of reasons, apart from optimism, that would have encouraged David to take a long break. Firstly, the company itself is performing. At 15,768 tonnes, nickel production in the 2009 financial year was down slightly on 2008’s 16,562 tonnes, but that was all to do with tailoring output to suit market conditions. The more important measures were that cash cost per pound of nickel fell by 16 per cent from A$6.40 to A$5.37, and that the grade of ore mined rose by 17 per cent from 2.63% nickel to 3.08%.

Those key performance indicators meant Mincor was able to pay a dividend and still start the current financial year with A$76 million in the bank against just A$1.3 million in debt. In fact, it’s better than that because the opening three months of the financial year saw the cash balance swell to A$91.3 million, after an A$8 million dividend payment, and after a modest celebration to mark the production of the company’s 100,000th tonne of nickel in concentrate, a production number which, satisfyingly, is just four-times the original reserve of 25,400 tonnes that Mincor booked when it acquired its first ex-Western Mining Corporation mine in 2001.

Healthy as that looks the key to Mincor is not past financial performances. It’s the future, and that’s why the two most important recent events in Mincor’s history are the confidence that allows the chief executive to take a breather, and the December 10th exploration update which brimmed with positive news. In fact, there was so much to digest that Minesite’s Man in Oz felt obliged to begin a conversation with Steve Cowle, Mincor’s chief operations officer, and the man left holding the fort over Christmas, with a simple question: what’s the pecking order of importance? “They’re all pretty important,” was Cowle’s answer. “We just happen to have a lot on right now.”

That’s certainly true. A pre-Christmas drilling rig count had seven underground rigs operating and one big rig on the surface, with another scheduled to start work in January. What they’re busy doing is expanding Mincor’s unique resource base in the nickel-rich Kambalda area of Western Australia. The aim is to catch the widely-expected upturn in nickel demand in 2010, and beyond, and to position Mincor as a world-class producer of the most profitable form of nickel, high-grade sulphide ore.

Despite its reputation as a difficult metal, and as a slow-mover behind the recovery recently enjoyed by copper, nickel is regaining traction. First Quantum certainly thinks so, given its courageous US$340 million purchase of BHP Billiton’s mothballed Ravensthorpe laterite nickel mine near the south coast of Western Australia.

For a novice investor, or even a long-term holder of Mincor paper, the way to see the company as 2010 rolls around is to follow the lead of the chief executive on his return. He’s returning to a company getting ready for a fresh start. Production from current mining operations in the company’s northern and southern operations, which are roughly speaking, north and south of Kambalda, are capable of ticking over at a rate similar to last year, and generating solid cash to service dividend and exploration requirements. The real value in Mincor resides in the exploration bonus, and that looks like it will come in from all directions.

In its December 10th update Mincor reported that exploration at the South Miitel mine, which was mothballed in the early days of the global financial crisis, had revealed fresh discoveries, including an eye-catching 10.14 metres at 3.17% nickel. This reinforced a view in the company that Miitel is a “sleeping giant” ready to wake when the nickel price is right. Other results results from recent drilling have included a new, high quality, target close to the Otter Juan mine called the Serp Trough, which is being drilled now, and a fresh zone of mineralisation at the Mariners mine. Meanwhile Mincor has also identified 10 nickel prospects ready for drilling along the Bluebush Line, and is also currently drilling at the McMahon, Ken and Carnilya Hill mines. There’s also an expectation that results will be delivered soon from drilling the company’s first USNOB (Ultra-Sized Nickel Ore Body) target at North Kambalda.

Steve Cowle agrees with Minesite’s suggestion that the hectic pace of Mincor’s exploration is setting the company up for a solid flow of news in 2010, but he balks at the question which every Mincor shareholder wants to ask: when will the mothballed mines be brought back into production? “There’s no question we’re doing a lot of drilling”, Steve said, “but that doesn’t mean we’re any closer to make a firm decision on mine re-opening”.

He continued: “There is no question that well will re-open Miitel. It’s a question of when. What we have to look at is the nickel price and the level of nickel stocks in the warehouses of the London Metal Exchange. While nickel stocks are still high we’re still a little cautious about the nickel price in the short term. I have to say we’re no closer to opening Miitel than we were several months ago, but at today’s prices we would be generating cash at Miitel. What we want to see is a sustained rise in the price and fall in stockpiles.”

What all that means is that Mincor can be seen in several ways. It is a proven generator of cash, with an established dividend record, and can stay that way for years. Or it can be seen as an exploration play with much of the prolific Kambalda Dome as its playground. Short-term, or long-term, it is definitely a stock to watch, which David Moore is no doubt doing from the back of boat somewhere enjoying a well-earned break.
 
Global Boom Builds for Epic Bust: Peter Boone and Simon Johnson
Commentary by Peter Boone and Simon Johnson, Jan. 5 (Bloomberg)

There are three main lessons to be learned from the past year.

First, we’ve built a dangerous financial system in Europe and the U.S., and 2009 made it more dangerous.

You can bet the bank, and, when the gamble fails, you can still keep your job and most of your wealth. Not only have the remaining major financial institutions asserted and proved that they are too big to fail, but they have also demonstrated that no one in the executive or legislative branches is currently willing to take on their economic and political power.

The take-away for the survivors at big banks is clear: We do well in the upturn and even better after financial crises, so why fear a new cycle of excessive risk-taking?

Second, emerging markets were star performers during this crisis. Most global growth forecasts made at the end of 2008 exaggerated the slowdown in middle-income countries. To be sure, issues remain in places such as China, Brazil, India and Russia, but their economic policies and financial structures proved surprisingly resilient and their growth prospects now look good.

Third, the crisis has exposed serious cracks within the euro zone, but also between the euro zone and the U.K. on one side and Eastern Europe on the other. Core European nations will spend a good part of the next decade bailing out the troubled periphery to avoid a collapse. For many years this will press the European Central Bank to keep policies looser than the Germanic center would prefer.

Bigger Crises

Over the past 30 years, successive crises have become more dangerous and harder to sort out. This time not only did we need to bring the fed funds rate near to zero for “an extended period” but we also required a massive global fiscal expansion that has put many nations on debt paths that, unless rectified soon, will lead to their economic collapse.

For now, it looks like the course for 2010 is economic recovery and the beginning of a major finance-led boom, centered on the emerging world.

But look a little farther down the road and you see serious trouble. The heart of the matter is, of course, the U.S. and European banking systems; they are central to the global economy. As emerging markets pick up speed, demand for investment goods and commodities increases -- countries producing energy, raw materials, all kinds of industrial inputs, machinery, equipment, and some basic consumer goods will do well.

On the plus side, there will be investment opportunities in those same emerging markets, be it commodities in Africa, infrastructure in India, or domestic champions in China.

Surplus Savings

Good times will bring surplus savings in many emerging markets. But rather than intermediating their own savings internally through fragmented financial systems, we’ll see a large flow of capital out of those countries, as the state entities and private entrepreneurs making money choose to hold their funds somewhere safe -- that is, in major international banks that are implicitly backed by U.S. and European taxpayers.

These banks will in turn facilitate the flow of capital back into emerging markets -- because they have the best perceived investment opportunities -- as some combination of loans, private equity, financing provided to multinational firms expanding into these markets, and many other portfolio inflows.

We saw something similar, although on a smaller scale, in the 1970s with the so-called recycling of petrodollars. In that case, it was current-account surpluses from oil exporters that were parked in U.S. and European banks and then lent to Latin America and some East European countries with current account deficits.

Sad Ending

That ended badly, mostly because incautious lending practices and -- its usual counterpart -- excessive exuberance among borrowers created vulnerability to macroeconomic shocks.

This time around, the flows will be less through current- account global imbalances, partly because few emerging markets want to run deficits. But large current-account imbalances aren’t required to generate huge capital flows around the world.

This is the scenario that we are now facing. For example, savers in Brazil and Russia will deposit funds in American and European banks, and these will then be lent to borrowers around the world (including in Brazil and Russia).

Of course, if this capital flow is well-managed, learning from the lessons of the past 30 years, we have little to fear. But a soft landing seems unlikely because the underlying incentives, for both lenders and borrowers, are structurally flawed.

Boom Goes on

The big banks will initially be careful. But as the boom goes on, the competition between them will push toward more risk-taking. Part of the reason for this is that their compensation systems remain inherently pro-cyclical and as times get better, they will load up on risk.

The leading borrowers in emerging markets will be quasi- sovereigns, either with government ownership or a close crony relationship to the state. When times are good, everyone is happy to believe that these borrowers are effectively backed by a deep-pocketed sovereign, even if the formal connection is pretty loose. Then there are the bad times -- think Dubai World today or Russia in 1998.

The boom will be pleasant while it lasts. It might go on for a number of years, in much the same way many people enjoyed the 1920s. But we have failed to heed the warnings made plain by the successive crises of the past 30 years and this failure was made clear during 2009.

The most worrisome part is that we are nearing the end of our fiscal and monetary ability to bail out the system. We are steadily becoming vulnerable to disaster on an epic scale.

(Peter Boone, a research associate at the London School of Economics’ Center for Economic Performance, is a principal in Salute Capital Management Ltd. Simon Johnson, a professor at MIT’s Sloan School of Management and former chief economist of the International Monetary Fund, is co-author of “13 Bankers” to be published in April 2010. The opinions expressed are their own.)
 
January 07, 2010

All’s Quiet On The Western Front, And The East Looks Pretty Snowed In Too Right Now

By Alastair Ford
www.minesite.com/aus.html

The early signs are that the first part of 2010 will shape up fairly well for mining companies. Miners were among the strongest performers on the FTSE as the trading year opened, and there’s plenty of that hackneyed old product “cautious optimism” around, although the markets weren't exactly on fire. Copper’s trading strongly, and gold is as robust as ever. And what with a global freeze on in the northern hemisphere there’s a new buzz on around thermal coal.

Coal has in any case been widely tipped as one of the better performing commodities for 2010, although the pundits and analysts have generally tended towards the higher end metallurgical variety on the basis that the Chinese steel industry will suck in ever increasing amounts. But, as Beijing attempts to recover from its heaviest snowfall for 60 years and prepares to grapple with its lowest temperatures since 1951, the pressure on China’s power networks is growing. Already, the Chinese government has ordered some restriction on electricity use, as a response to the inability of transport networks and coal mines to handle the heavy demand.

What’s more, bottlenecks at two of the world’s greatest export terminals for coal, Newcastle in Australia, and Richard’s Bay in South Africa, mean that the ability of global markets to respond to a major increase in demand remains limited. Those major companies that already have space allocated in these terminals for the shipment of thermal coal, like BHP Billiton and Xstrata, could be direct beneficiaries of increased prices. Other, smaller, companies could benefit too, although ironically one of Australia’s smaller domestic suppliers, Griffin Coal, has just been put into administration after failing to keep to its debt covenants. Still, on the plus side, at least relations between China and Australia seem to have got off on the right foot this year, as Yanzhou Coal Mining has just bought Felix Resources in a A$3 billion deal.

It’s not only China that’s suffering from the unexpectedly cold winter conditions. The US, Mexico, and much of Europe are also experiencing exceptionally cold conditions, and it’s not only China that’s experiencing pressure on its power supplies. In the UK too, power supplies look shaky, and the opposition Conservative party has highlighted that high consumption of gas in response to the cold has meant that the UK’s gas reserves are running dangerously low. Now would not be a great time for Russian energy giants like Gazprom to start playing up, and thankfully, apart from an ongoing dispute with Belarus, supplies from Russia seem to be flowing smoothly. The same can’t be said about Russian coal shipments into China and the east, which are under some strain, but that’s because of export capacity constraints rather than any sort of brinkmanship.

Such is the impact this year of the winter cold that the likes of London broking house Fairfax feel able to issue in daily research notes such catch-all phrases as: “Metals prices are rising on the disruption”. The thinking seems to be that with transport networks under pressure, buyers will pay that much more to secure supply. But, that said, there are plenty of other microeconomic factors affecting prices – a planned strike at a Codelco mine put upward pressure on copper this week, and the ongoing action at Voisey’s Bay continues to skew the nickel markets, to name but two.

Meanwhile, although the cautious consensus for 2010 is optimistic there’s still plenty of uncertainty around, and one or two naysayers too. Try this one for size from the Daily Telegraph’s Ambrose Evans-Pritchard: “As the great bear rally of 2009 runs into the greater Chinese Wall of excess global capacity, it will become clear that we are in the grip of a 21st Century Depression – more akin to Japan's Lost Decade than the 1840s or 1930s, but nothing like the normal cycles of the post-War era”. This from one of the few global commentators who really knows what he’s talking about. He may not be right, of course, but his basic thesis that the new economies have not yet matured enough to take up the demand deficit left by a West still struggling to come out of depression surely bears scrutiny.

That apocalyptic scenario isn’t with us yet, though, and in the meantime there’s likely to be plenty of interest in mining companies during the first few months of the year, as the momentum built up towards the end of 2009 continues to roll on. In truth, in spite of the upward trend, markets have been quiet during the first week of 2010, and probably won’t pick up for a week or two. Indaba beckons in February, and PDAC in March. Those two events will likely spawn a deal or two, although one will be a lot snowier than the other. No prizes for guessing which will be the better attended as far as the London contingent is concerned!
 
Bubble warning

The Economist
Jan 7th 2010

Markets are too dependent on unsustainable government stimulus. Something’s got to give.

The effect of free money is remarkable. A year ago investors were panicking and there was talk of another Depression. Now the MSCI world index of global share prices is more than 70% higher than its low in March 2009. That’s largely thanks to interest rates of 1% or less in America, Japan, Britain and the euro zone, which have persuaded investors to take their money out of cash and to buy risky assets.

For all the panic last year, asset values never quite reached the lows that marked other bear-market bottoms, and now the rally has made several markets look pricey again. In the American housing market, where the crisis started, homes are priced at around fair value on the basis of rental yields, but they are overvalued by almost 30% in Britain and by 50% in Australia, Hong Kong and Spain.

Stockmarkets are still shy of their record peaks in most countries. The American market is around 25% below the level it reached in 2007. But it is still nearly 50% overvalued on the best long-term measure, which adjusts profits to allow for the economic cycle, and is on a par with two of the four great valuation peaks in the 20th century, in 1901 and 1966.

Central banks see these market rallies as a welcome side- effect of their policies. In 2008, falling markets caused a vicious circle of debt defaults and fire sales by investors, pushing asset prices down even further. The market rebound was necessary to stabilise economies last year, but now there is a danger that bubbles are being created.

Forever blowing bubbles?
Aside from high asset valuations, the two classic symptoms of a bubble are rapid growth in private-sector credit and an outbreak of public enthusiasm for particular assets. There’s no sign of either of those. But the longer the world keeps its interest rates close to zero, the greater the danger that bubbles will appear””most likely in emerging markets, where growth keeps investors optimistic and currency pegs import loose monetary policy, and in commodities.

Central banks have a range of tools they can use to discourage the growth of bubbles. Forcing banks to adopt higher capital ratios may curb speculative excesses. As Ben Bernanke, chairman of the Federal Reserve, argued this week, the rise in American house prices could have been limited through better regulation of the banks. The most powerful tool, of course, is the interest rate. But central banks are wary of using it to pop bubbles because it risks crushing growth as well. And, with the world economy in its current fragile state, they are rightly unwilling to jack up interest rates now.

But even if governments judge that the risks posed by raising rates now outweighs that of keeping them low, investors still have plenty of reasons to worry. The problem for them is not just that valuations look high by historic standards. It is also that the current combination of high asset prices, low interest rates and massive fiscal deficits is unsustainable.

Interest rates will stay low only if growth remains slow. But if economies grow slowly, then profits will not rise fast enough to justify current share prices and incomes will not rise far enough to justify the prevailing level of house prices. If, on the other hand, the markets are right about the prospects for economic growth, and the current recovery is sustained, then governments will react by cutting off the supply of cheap money later this year.

It doesn’t add up
But the more immediate risks may be posed by fiscal policy. Many governments responded to the crisis by, in effect, taking the debt burden off the private sector’s balance-sheets and putting it on their own. This caused a huge gap to open up in government finances. Deficits in America and Britain, for instance, stand at more than 10% of GDP.

Most developed-country governments have managed to finance these deficits fairly easily so far. In the early stages of the crisis, investors were happy to opt for the safety of government bonds. Then central banks resorted to quantitative easing (QE), a polite term for the creation of money. The Bank of England, for example, has bought the equivalent of one year’s entire fiscal deficit. There are signs, however, that private-sector investors’ appetite for government debt may be just about sated, as they contemplate the vast amount of government bonds that are due to be issued this year and the ending of QE programmes. The yields on ten-year Treasury bonds and British gilts have both risen by more than half a percentage point since late November.

Investors (along with this newspaper) would like to see governments unveil clear plans for reducing those deficits over the medium term, with the emphasis on spending cuts rather than tax increases. But politicians are nervous about the likely reaction of electorates, not to mention the short-term economic impact of fiscal tightening, and are proving reluctant to specify where the cuts will be made.

Markets have already tested the ability of the weakest governments to bear the burden of their debt. Dubai had to turn to its wealthy neighbour, Abu Dhabi, for help. In the euro zone, doubts have been raised about the willingness of Greece to push through the required austerity measures. Electorates are likely to chafe at the cost of bringing down government deficits, especially if the main result is to repay foreign creditors. That will lead to currency crises and cross-border disputes like the current spat between Iceland, Britain and the Netherlands over the bill for compensating depositors in Icelandic banks. Such disputes will lead to further outbreaks of market volatility.

Investors tempted to take comfort from the fact that asset prices are still below their peaks would do well to remember that they may yet fall back a very long way. The Japanese stock market still trades at a quarter of the high it reached 20 years ago. The NASDAQ trades at half the level it reached during dotcom mania. Today the prices of many assets are being held up by unsustainable fiscal and monetary stimulus. Something has to give.
 
January 09, 2010

That Was The Week That Was ... In Australia

By Our Man in Oz
www.minesite.com/aus.html


Minews. Good morning Australia. It seems that 2010 has started strongly for you.

Oz. It has, and in a pleasing way too. Much of last week’s action was at the small end of the market, with solid rises among gold, iron ore, and uranium. There were even a few zinc stocks on the move such as CBH (CBH). That won’t have taken Minesite readers too much by surprise though, as CBH was the subject of some discussion when we last spoke.

Minews. Has anything happened with CBH?

Oz. No detail, yet, but a deal is on the way, as the company requested a trading suspension on Friday after its shares jumped from A10 cents to A14.5 cents. The speculation in the local media is in line with what we reported a week earlier, namely that the big zinc specialist, Nyrstar, is interested in CBH’s Endeavour mine, and in its Broken Hill assets in New South Wales. Interest in CBH hit a peak on Thursday when more than 20 million shares changed hands in a frenzy of buying.

Minews. Interesting that zinc is making a return. But let’s start our price report with gold stocks as gold remains the major interest among international investors.

Oz. Okay, but before we get going with that, it is worth looking in more detail at the overall market because while there examples of stocks rising by 20 per cent, and more, abounded, those moves were not reflected in the indices. The all ordinaries added a modest 1.2 per cent last week, the metals index rose by 3.1 per cent and the gold index gained 3.3 per cent. The disconnection with the small end, where the best rises were recorded, was that the big boys of mining, BHP Billiton and Rio Tinto, did not perform as strongly. BHP, for example, was precisely in line with the overall market, up by just 1.2 per cent.

Minews. Noted. Prices now please, starting with gold.

Oz. Best of the gold stocks was Beadell Resources (BDR), which added A8 cents to A31 cents after announcing encouraging results from its Handpump project in the remote West Musgrave region of central Australia. Interest in the discovery has been growing and while the latest assays look modest - 15 metres at 2.3 grams a tonne, for example - the company believes it has outlined a major new mineralised system. On Tuesday, as interest in Beadell grew, the stock traded up to a 12 month high of A40 cents, in heavy turnover. One to watch.

Catalpa (CAH), which is putting the finishing touches to its redevelopment of the Edna May mine and has successfully bedded down its merger with Lion Selection, was also better off, ending the week at A$1.54, up A16 cents. Meanwhile, Cortona (CRC) finalised a troublesome capital raising million, putting an additional A$10.3 million in the kitty for its Dargues Reef project, and adding A4 cents to its share price in the process. The shares closed at A18 cents. Meanwhile ElDore Mining (EDM), which has rarely hit the headlines, was the subject of much speculative interest this week, after it announced a deal to buy the Wyo Well gold prospect east of Kalgoorlie, ElDore rose by A4 cents to A14 cents in heavy turnover.

It was hard to find a gold stock which fell last week, which is interesting in itself, because the Australian dollar gold price did decline fractionally thanks to the US dollar price holding steady, and the Aussie dollar adding US1 cent. Among the sector leaders, Centamin (CNT) rose by A14 cents to A$2.30, Avoca (AVO) put on A9 cents to A$1.90, and Perseus (PRU) hit a 12 month high of A$2.10, before easing to close at A$2.05, a rise of A29 cents. Elsewhere, Adamus (ADU) rose by A4 cents to A47.5 cents, Troy (TRY) added A11 cents to A$2.51, and Chalice (CHN) was A2 cents higher at A46 cents. Kingsrose (KRM) was also better off as buyers pushed the shares up to a 12 month high of A78 cents on Friday, before the price eased off a little. Kingsrose eventually closed out the week at A75 cents for a gain of A13 cents on the week.

Minews. Iron ore now, as that is in the news with the annual price talks getting underway with Japanese and Chinese steel mills.

Oz. No doubt about the news-generating qualities of iron ore, but there are plenty of doubts about the price-setting process. Neither the mills nor the miners seem interested in giving any ground at this year’s talks, which might indicate the death of annual price agreements and the start of a quarterly process, or some other trading system. Chatter down this way is that a 20 per cent price increase is on the cards, but that China is far from happy at having terms dictated by the three major suppliers, BHP Billiton, Rio Tinto and Brazil’s Vale.

It’s the combination of the potential for a breakdown in the benchmark price system, and China’s encouragement of companies competing with the big three which continues to drive activity at the small end of the iron ore sector. The best performer last week was Fortescue Metals Group (FMG), which added A60 cents to A$5.06, but did get as high as A$5.57 on Thursday, a 12 month high. Fortescue will be the biggest winner from any breakdown in China’s relationship with BHP Billiton and Rio Tinto, as it has its own rail and port system

Other iron ore moves came from Atlas (AGO), up A27 cents to A$2.15, BC Iron (BCI), up A9 cents to A$1.27, Giralia (GIR), up A24 cents to A$1.69, and Brockman (BRM), up A36 cents to A$2.80. Also stronger, Iron Ore Holdings (IOH) rose A35 cents to A$1.80, Hampton Hill (HHM) rose A11 cents to A43 cents, and FerrAus (FRS) rose A9 cents to A75 cents. And Magnetic Resources (MAU) rose an eye-catching A15.5 cents to A33.5 cents, thanks to publicity during the week about its novel iron ore exploration technique which involves following railway lines and looking for orebodies close to transport, rather than wandering into the Australian wilderness and hoping that someone will build a railway for you.

Minews. Novel, and clever by the sound of it. Base metals now, please.

Oz. Zinc, as mentioned, has made a modest return to favour, with CBH leading the way. Elsewhere in the space Perilya (PEM), the major owner of tenements in the Broken Hill area, added just A1 cent to A68 cents, but it’s worth noting that a year ago the stock was trading at just A12.5 cents. Terramin (TZN) continued its rise, adding A10 cents to A90.5 cents, and TNG (TNG) rose a modest A0.2 of a cent to A8.2 cents. Finally Kagara (KZL) rose by A9 cents to A$1.18, but perhaps because it announced first nickel production from its Lounge Lizard project.

Other nickel stocks were also stronger thanks to the price of the metal holding at around US$8.25 a pound, which represents a strong profit margin for most producers. Mincor (MCR), which we took a look at last week, added A11 cents to A$1.90. Minara (MRE) rose by A2.5 cents to A84 cents. Mirabela (MBN) gained A15 cents to A$2.68, but Independence (IGO) slipped A7 cents lower to A$4.84, despite trading as high as A$5.11 early on Friday.

Copper continued to generate interest thanks to reports of supply shortfalls and industrial action in some of the bigger South American mines. Sandfire (SFR) added A15 cents to A$3.99, Citadel (CGG) was A2.5 cents higher at A40 cents, Equinox (EQN) gained A23 cents to A$4.57, Exco (EXS) closed the week at A24.5 cents, up A2 cents, and OZ Minerals (OZL) added A6 cents to A$1.24. Meanwhile, Gunson (GUN) which we took a look at midweek, partly on account of its Mt Gunson project in South Australia. popped up a very pleasing A3.5 cents to A14 cents, and did get as high as A16.5 cents, a 12 month high. There was no other news about apart from the Minesite story, so it looks like investors were taking their cue from Minesite. And who can blame them?

Minews. Enough of the back-slapping. Uranium and coal next.

Oz. It was a surprisingly strong week for most uranium stocks, given that the price of the metal hasn’t moved recently. Greenland Minerals (GGG) was the star, shooting up by A22 cents to A80 cents, although it did get as high as A93.5 cents after it drew the market’s attention to the new mining law that has just come into effect in Greenland. Stonehenge (SHE) also drew in the speculators, and rocketed up by A6.5 cents to A10 cents after it announced the acquisition of a uranium project in South Korea. At one stage, though, Stonehenge traded as high as A17.5 cents. Elsewhere, Toro (TOE) also generated news flow with government approval for a trial pit at its Wiluna project, and the shares rose by A2 cents to A16 cents in response. Forte (FTE) added A2 cents as well, to close at the same price, A16 cents, but recent sector leaders, Extract (EXT) and Mantra (MRU) fell by A19 cents and A27 cents respectively to A$8.29 and A$4.38.

Coal stocks were stronger across the sector, in line with the higher oil price. Whitehaven (WHE) was up A22 cents to A$5.37, Coal of Africa (CZA) was up A45 cents to A$2.36, Macarthur (MCC) was up A92 cents to A$12.05, and Centennial was up A13 cents to A$4.13.

Minews. Any specials to finish?

Oz. We did have a few interesting moves last week from molybdenum stocks. Moly Mines (MOL) added A20 cents to A$1.04, and Aussie Q Resources (AQR) roared ahead after reporting a discovery at Whitewash South in Queensland. The discovery looks like a large porphyry system rich in molybdenum, copper and tungsten. Traders piled into the stock, driving it up by 243 per cent, and it closed the week at A27.5 cents. At one stage the stock was trading at A33.5 cents, in heavy turnover.

Minews. Thanks Oz.
 

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