What a big country Australia is!
Your Melbourne-based editor is back from a great visit to Geraldton in Western Australia. When you spend too much time behind a desk, you can forget how big Australia is. Getting ready to board the flight from Perth to Geraldton, we noticed right away all the red dust on the boots and shoes of the folks who were coming down from what everyone is tipping to be the next big iron ore province.
More on what we found in Geraldton next week. One point worth considering today is political risk. You don’t normally associate Australia with political risk. Usually, it means the chance that the government of a small country will change the rules on you (Guinea) or some neo-Marxist windbag like Hugo Chavez will nationalise your investment (Venezuela).
But bureaucratic red tape can also be a kind of political risk. Capital is impatient. It has choices. It goes where it’s treated best. If it takes too long to get mines into production in Australia, you sense foreign partners and investors will look for other world-class mineral deposits and projects to develop.
For example, there is the particular case of uranium. Now that the Western Australian government has introduced legislation to ban uranium mining in WA, foreign investors are indicating they’ve had enough. Canada’s Mega uranium said it will walk away from its $2 billion investment in its WA uranium project because it “cannot continue to invest in projects/jurisdictions in which it has little or no chance of a return.”
Pretty simple. Of course, if the people of WA decide they don’t want a uranium mining industry, that’s fine too. That’s what self-government is all about. But we also think, in our humble, loud-mouthed, American opinion; this reflects a lack of seriousness in the energy debate in Australia.
Power has to come from somewhere. If you want to limit emissions from coal-fired power without leading directly to lower rates of growth (or downright contraction) then you need other alternatives for base-load electricity. Renewable targets are all pie-in-the-sky. They’re completely unrealistic.
As far as we can tell, the only realistic alternatives to coal and natural gas for base-load electricity are geothermal and solar thermal (and perhaps, large stacks of solid oxide fuel cells). We met one citizen of Geraldton who said that the issue of climate change was more urgent than both world wars combined. If public policy debate in Australia is informed by this kind of earnest hyperbole, you can kiss a lot of foreign investment goodbye.
Of course, it helps that Australia has resource wealth. That ensures there will always be interest in new projects. You can’t mine the stuff if you don’t have it. And from our conversations with a few of the miners, they say the problem is not so much the cumbersome nature of the permitting process (which has always been that way), but the number of new projects seeking approval. There’s a big backlog.
There’s also a major labour shortage forecast. But hey, Geraldton is a nice place. If you have a son or a daughter or niece of nephew looking to make a new start and try something exciting in life, there are worse courses of action than packing up and heading west. There’s a whole lot of beach, a whole lot of sun, and a whole lot of work to be done.
What about the markets? Well, nothing major seems to have happened while we were away. Our thesis, then, is basically the same. Expect more write downs and losses in the financial asset markets. The whole model of the last fifty years, Credit, Consumption, and Collateralisation, is dying if not dead.
Meanwhile, the other more tradition model of economic prosperity (you know, the one that made Britain and American industrial and geopolitical powers) is based on savings, investment, capital formation, and production. You make more money making stuff than you do buying stuff.
The good news for Aussie investor is that Aussie firms are key to the whole “industrial production” model. And the even better news is that the recent correction in resource stocks leaves many good projects selling at attractive valuations. What more can you ask for?
Oh, many of the projects are flying under the radar of institutional analysts because they’re either too small…or the institutions are using discounted cash flow models to evaluate mining companies…instead of learning how to value a resource. “Focus on good people, good projects, and good partners,” is what we told the crowd at the end of the day Wednesday.
Markets and Money