What a week in the markets. High profile hedge funds in Europe and America continue succumbing to the woes in the credit market. Paul Tudor Jones’ Raptor Fund had a forgettable July, losing nine percent for the month. Rumours abound that other funds are in more serious trouble. But none of this seems to have bothered Rio Tinto yesterday.
The good news for Rio Tinto is that it doesn’t have any exposure (like Mac Bank) to the American subprime crisis. The bad news is that 6-month net earnings fell for the company, even as metals prices rose.
Rio’s new front man Tom Albanese told investors that net earnings fell by 14% from the same period last year to AU$4.1 billion.
But Albanese has his eye on the big picture, too. “The long term growth trend in Chinese iron ore demand will require continuing investment, and will open up further supply opportunities outside Australia, such as our resource at Simandou in Guinea, where we are looking at a 70 million tonne per annum operation.”
Rio aims to increase its iron ore production the Pilbara to 320 million tonnes per year. Baby steps, though. The company’s first goal is to boost production to 220 million tonnes by 2009. It will get there partly because of an AU$409 million investment in the Hope Downs project in Western Australia. Rio has fast-tracked the expansion of the project, jointly owned by Hancock Prospecting.
In the most recent issue of Outstanding Investments we told the story of Lang Hancock’s Pilbara saga. Hancock tried for thirty years to open up an iron ore mine in the region. He, as much as anyone else, discovered the huge high-quality Marra Mamba ore bodies. In fact, prior to Hancock’s discovery of the ore in the Hamersley Range, Australia had a ban on iron ore exports. Times change.
Off its earlier highs, Rio is the kind of resource blue chip that should thrive as the world economy decouples from the American growth engine and hitches itself to China. High energy costs and labour shortages are eating into Rio’s profits. But the fact that the company can’t keep up with demand is actually opening up a whole new tier of investment opportunities for Aussie investors.
“Economies that are urbanised, heavily reliant on investment, and export-oriented tend to use more metals and energy as they grow,” wrote Ross Garnaut in yesterday’s Financial Review. In a research report titled “China’s resources demand at the turning point,” Garnaut and Ligang Song from the Australian National University argue that China’s resource-intensive growth phase isn’t already behind us, but just ahead.
That sure is good news for investors who were shellacked by this week’s volatility. It means that opportunities in junior resource companies and mining services (businesses that support the expansion of resource production) have plenty of run left in them. Australia really is the lucky country. While the rest of the world (and a few Aussie banks) lick their credit wounds, there is real earnings growth to be had if you look in the right place.
Markets and Money