Hey, Give The Mining Guys a Break

‘China has set its initial target for economic growth at 7.5 percent for a second year and tightened its inflation goal to the lowest level since 2010…’ – Bloomberg News

The Chinese government must be the world’s best economic forecasters. They set a target and whadda-ya-know, they get it almost spot on. Today’s Age reports:

‘The December quarter GDP growth rate of 7.9 per cent was faster than expected and up from 7.4 per cent in the September quarter, which was a three-year low.’

Perhaps this boost from the previous quarter explains the sharp iron ore price rise (see chart in today’s other article Money Weekend Market Digest ). The price had almost doubled since last September’s low. But after hitting a new high last week, the price has hit a snag.

What does it mean? Has China done all of its iron ore buying for the year? If so, why has it stopped? Has China’s stimulus program already stopped? We know, that’s too many questions. And unfortunately, we don’t have all the answers. But we can shed some light on the risk and reward of resources investing…

Although, if this is the end of China’s second boom, it will pay to go easy on building up your share portfolio. Our old pal Greg Canavan is convinced this second boom is a trap for unsuspecting investors. He lays out his reasons for a Chinese economic collapse here.

One thing’s for certain, the uncertainty over China, the Aussie government’s mining tax, and the ability of companies to secure funding, investors are getting restless. According to the Australian:

‘The world’s most influential mining investor has slammed the big miners as “reckless and profligate”, a day after Rio Tinto revealed a $US14 billion writedown on a series of botched acquisitions.

 

‘Evy Hambro, portfolio manager at BlackRock’s $US12 billion World Mining Fund, also predicted further writedowns from the resources industry, singling out Xstrata and Glencore as likely to reassess the value of their assets following their merger.’

Give ’em a break. We’re serious. Forecasting business conditions and consumer demand is hard at the best of times. Big investors like Mr Hambro seem to forget that.

It’s hard for businesses to forecast the future because of so much interference by central banks and governments. Think about it, most businesses have no more clue than you about whether or how much money a central bank will print or how much a government will cut or raise taxes.

So the idea that mining companies have been ‘reckless and profligate’ is a bit harsh.

That’s Why They Get the Big Bucks
 

Let’s put it this way. During the 2003-2007 mining boom, Aussie mining firms invested a lot of money and raised a lot of capital from investors. They used this cash to invest in infrastructure and new projects.

It seemed like a no-brainer. And those companies that didn’t raise money and invest early enough, soon found themselves in trouble by the end of 2008 when it became almost impossible to get investors to part with cash.

But imagine if the mining boom had only lasted from 2003-2005. We’re sure investors would have called mining companies that raised capital and invested in their business reckless and profligate too. ‘What were they thinking? Did they think they were going through a never-ending mining boom?’

But that’s what happens. Mining executives have to make a decision. If they want to invest in a mining project they have to go the whole way. There are certain minimum fixed start-up costs that firms incur regardless of the size of a mine.

You can’t buy half a truck…or only part of a processing facility…or just lay half the rail track to the port. In many cases it’s all or nothing. Some companies choose to do nothing and investors rip them for under-utilising capital.

The breaking news for Mr Hambro is that things aren’t likely to change anytime soon.

Between now and the end of the year the stock market will either go up or go down. If it goes up those firms that have spent and invested will be heroes. If the market goes down, those same companies will be ‘reckless and profligate’.

We guess it’s tough being a CEO. But that’s why they get the big bucks.

Cheers,
Kris

PS. Read our new weekly feature, the Money Weekend Market Digest

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