The Fourth Biggest Iron Player in Australia

Riding a bicycle in Melbourne’s autumn is like playing with fire, reader. The weather changes a lot quicker than we can ride.

So, this morning, we write to you in a puddle of our own regret. We lacked foresight, and water-proof pants. We’ll try to exhibit a bit more of it as we map out where the money is today (foresight, not water-proof pants).

Foresight, of course, is a quality everybody wants and nobody has. Who couldn’t do with a little more of it? It’s one of those constants that you always need to constantly invest well…foresight, hard work, patience, a bit of luck here, some good timing there.

Meanwhile, the only news that matters in Australia today seems to be takeover-related…

Western Juniors Could Create 4th Biggest Iron Player in Australia

Here’s some foresight. Investors who jumped on the iron ore train are getting their dividends. Yesterday Murchison Metals (ASX:MMX) gave iron cousin Midwest (ASX:MIS) an all-share merger offer worth . The market loved it. Midwest leapt 12.3%. Murchison flew 8.3%.

Everybody won, except Sinosteel. The Chinese giant was closing the net around its prey, Midwest. The nerve of another prey to go and outdo it.

Together, the two iron diggers would have a market cap of AU$3.2 billion. That’s bigger than Portman (ASX:PMM), Mount Gibson (ASX:MGX) or the other second-tier contenders. It’d leapfrog the companies up to fourth place in the industry, behind Fortescue (ASX:FMG).

The structure of the deal, though, tells you a little more about the whole matter.

Sinosteel already has 19.9% of Midwest. That’s the maximum you can own without bidding.

In a direct response to the stake, Murchison has proposed a reverse-takeover. It has offered itself up as a sacrifice to the deity of iron ore. Under Australian corporations law, a reverse-takeover means the deal only needs 50% acceptance from Midwest shareholders to go through. Otherwise, a standard takeover would’ve meant a minimum of 75%.

Ergo…the two do not want to be bought. Not by China. Not at any price near what Sinosteel is offering. The Australian iron sector is combatting external consolidation with internal consolidation. Both mean share prices are going up. Here the five top juniors’ performance this year. They’ve made gains of between 21% and 65%.

Midwest’s management has recommended that shareholders accept the deal. You’ll find out in the next three months what they think of it.

You’ll also find out exactly how desperate China is to get its paws on our iron. The ball’s in your court, Sinosteel. The company will most likely withdraw, and reassess. Perhaps it’s content to pay huge spot and contract prices for iron in Asia. Or perhaps it’d like to own the next best producer after Fortescue.

St George Accepts Westpac Bid…Almost

A much bigger takeover is slowly plodding towards the finishing line. St George (ASX:SGB) signed a scheme of agreement with Westpac yesterday. It had prudence enough, though, to add some fine print to the contract. We’ll do a deal you, Westpac. As long as your shares stop dropping

So far, Westpac’s bid is 10% smaller than when it came into the world. The stock is at a year-low. If the fall that began last week in the All Ordinaries accelerates, Westpac’s shares may continue to erode. Maybe the finishing line is a little further away than we thought.

Two takeovers are evolving parallel to each other. There’s the iron story in the hard-asset market, and the banking story in the financial sector. Both are mergers, involving shares only. No cash. Analysts tell us that the prices are good. Yet the parties involved have reacted entirely differently.

Midwest said “Yes” and left it that. St George said “Maybe. Just don’t let your share price fall.”

Sadly, Westpac doesn’t have a lot of control over that. And those two reactions might reflect the underlying businesses, we reckon. Iron ore miners are willing to jump on the front foot. They’re merging to create more scale in a growing industry. Banks are on the back foot. They’re merging as a defense against falling earnings margins.

Westpac’s interest margin has fallen from 2.6% in 2003 to 2.25% last year. It won’t have improved since the last report, filed in November. Bankers aren’t making as much as they used to. That’s the bottom line. There are better companies to invest in.

How to Trade Gold Shares

Gold shares are unique. Most indexes have followed pretty much the same pattern. Not gold. We thought today we’d have a look at something out of the norm, to see if there are some gains brewing.

Gold shares have traded in a large channel since last September. It’s taking both the good and the bad at this stage. On one hand, there are the rising prices of bullion. Gold has moved up to US$930 just this morning. On the other hand, it has suffered from generally choppy share conditions.

The price action of the index illustrates those contrarian forces. The chart is a succession of fast moves in both directions. It’s a rangy market where no clear long-term direction appears.

We’ll see what our indicators think of that…

Between August and November 2007, the index rose by more than 55%. Two other attempts to break above 7,000 level failed. Those historical high points constitute the resistance line of the current trading channel.

The low was posted on April 30 just above 5,100 points, which is support line of the trading channel.

The technical indicators show that mixed signals argue for a further rangy trading price action during the coming weeks. For traders, there’s a lot of potential to pick up some gains.
The 14-day MACD is bullish. This, one of our favourite indicators, fell to a historical low levels at the beginning of May. Then it turned up and then crossed above the 0 line. The underlying index was clearly oversold. It argues for upward momentum in the mid-term.

A moving average crossover agrees. The 10-day MA crossed above the 50-day MA last week. It’s a buy signal for mid-term trend-followers.

The 5-day Stochastic Oscillator, however, respectfully disagrees. But it disagrees on a shorter time-scale. The oscillator says that gold shares have gotten a little hot in the last few days.

The signals may disagree, but the conclusion is clear. There’s money to be made in the medium term according to the charts. But you could perhaps wait for a decent correction before moving in. The next price target is perhaps 5,300 points a 38.2% Fibonacci retracement. Then traders will look to switch back to long positions.