The Mining Shuffle

Plop. We’re back below 5000 on both major Australian indices. Find out why below.

Slipstream Trader Murray Dawes is talking to himself out loud again. This morning he told the office, ‘BHP down 2.5%! RIO down 2%!’ You know something’s going to happen in the markets when he comes in each morning with either a big grin or a grumpy scowl. To find out what Murray and his subscribers are up to, click here. Lately, he’s been doing a jig as turmoil returns to the market.

Speaking of which, ever heard of the Melbourne Shuffle? It’s kind of like moon walking, but you glide in any and every direction. It’s the only dance move we’ve ever considered learning. You can find a guide here. (Warning, only try this at home.)

Australia’s mining shuffle is a little different, but the idea is the same. Lots of thrashing about, without actually getting anywhere. mining shares have been performing poorly, and not just this morning.

BHP’s share price is either flat or down whether you measure it on a one year, two year, three year, four year or five year basis. RIO Tinto is worse. The smaller miners are littered with a mix of success stories and failures. Overall, the mining boom has been nothing more than a shuffle on the spot.

Even though share prices haven’t done well, at least the mining boom has supported vast amounts of jobs, hasn’t it? According to the Australian Bureau of Statistics, less than 2% of Australia’s workforce is in mining. The RBA disagrees, saying about 1.1 million Australians are employed directly or indirectly. You just gotta love statistics!

In the end, there’s probably little doubt that Australia’s economy is mining driven, whatever the numbers might say. But now, all that looks set to change…for the worse.

The mining boom is shuffling right on out the door. It looks like Australia’s big guns are pulling out of Australian mining projects en masse. And that means Australia’s poor mining share performance is going to spill over into the economy.

Here are some recent headlines:

  • BHP, Rio Asset Sales Could Raise $35 Billion
  • Vale Seeks to Sell Minority Stakes in Australian Coal Assets
  • Rio Tinto Mulls Sale of New Zealand Iron Sands

So who’s cried out ‘fire’ in this crowded theatre? It’s a question of supply and demand (surprise!).

On the demand side, you have China’s slowing construction boom. Economist Andy Xie says the slowdown will send iron ore prices below $60 a tonne from $150 a tonne. The price is now sitting around $130. If he’s right, Australia’s miners and our economy are in for a fright.

What kind of fright? We can ask China’s stock market. The Shanghai Composite Index (in red) seems to have a habit of letting the world know when it’s getting too optimistic. Each time it diverges by falling, the American stock market eventually catches up.

Right now it seems to know something the rest of the world doesn’t:

China’s Stock Market Warning Signal

China's Stock Market Warning Signal
Source: ZeroHedge

If history repeats and the American stock market follows China’s with a drop of around 6%, you could see a drop in our market too.

This morning’s sell-off (Murray yells in the background, ‘RIO’s down 3% now!’) is due to rumours coming out of the Mines and Money Conference in Hong Kong. Apparently, the mining executives are being a little more realistic, i.e. pessimistic, about China’s prospects behind closed doors. But word has gotten out. Our very own Dr Alex Cowie, editor of Diggers and Drillers, is presenting at the conference. But he’s actually optimistic. More on that below.

On the supply side of our mining boom you have Australia’s high dollar cutting into profits, its political risk (read mining tax) making investment risky and of course spiralling costs. Who would want to do business here?

But don’t worry too much. Rumours are that Australia’s miners will be reequipping to produce ‘Ultimate Machines’ instead of resources. These machines are designed for one purpose only. To find out more, click here.

It’s not all bad news in the mining world. Apart from Ultimate Machines, two sectors of the mining world are set to go gangbusters. And Australia is well placed in both. And that means you can profit.

Diggers and Drillers editor Dr. Alex Cowie has been busy telling a Hong Kong audience about one of those two sectors. He sent around a copy of his presentation. Based on his notes and Powerpoint presentation, you could say he’s bullish about gold stocks. But that would be an understatement.

His main argument is simple. Things could hardly get much worse and people could hardly be more pessimistic. The details involve factors like downgraded institutional forecasts, record short positions, record ETF liquidation and much more. It takes guts to call out ‘buy’ in the midst of all that.

But what caused the negativity in the first place? This is where things get interesting, even if you have no interest in buying gold shares.

The costs of operating a gold mine have been skyrocketing, according to Alex’s presentation. Cash costs are up 256% over 10 years! No wonder gold stocks have struggled.

According to Alex, there has been a ‘cultural change’ in the gold industry. Big waves of cost cutting are in the pipes. And that could see margins plump up just when he expects a new rally in the gold price itself. But those margins will grow at the expense of miners and their suppliers. That means those 1.1 million jobs in the mining industry won’t be getting a much of a boon out of the gold boom.

What about the second sector of the mining industry Australia is brilliantly placed to profit from? Dan Denning calls it the ‘Energy Stock Blowout’. If you have trouble imagining turning $30,000 into $1,077,900 in seven years, you need to watch his short video introduction.

Nickolai Hubble.
Markets and Money Weekend Edition

Join me on Google+
From the Archives…

Learn How to Play the Rules Game to Cancel Your Mortgage
16-03-13 – Nick Hubble

Seven Situations to Watch in the Pacific Currency War
15-03-13 – Dan Denning

Why Copper Doesn’t Like the S&P500
14-03-13 – Greg Canavan

A Crazy Warning Sign for BHP and CBA Shareholders
13-03-13 – Greg Canavan

Hugo Chavez, RIP
12-03-13 – Bill Bonner

Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money