Finance

The Silent Boom in Aussie Resources

The Silent Boom in Aussie Resources

Ka-ching!

That’s the sound of billions rattling into the tills of Aussie resource companies.

The Australian reports this morning that miners as well as oil and gas firms just had their best quarterly operating profit ever.

Exports are surging and, due to the mining downturn, companies have spent years slashing costs and investing in higher productivity.

It’s now showing up in great revenue figures.

And yet all you hear are negative stories on Australia.

Newsflash: Mining is having a silent boom.

This is bullish for the ASX. And if commodity prices get stronger, as I expect, we could really get a big lift in the market over 2018 and 2019.

I keep saying the same thing…now is not the time to be cowering in fear expecting a crash.

It’s a time to be hunting down great opportunities…

Australian businessman Andrew ‘Twiggy’ Forrest isn’t resting on his laurels.

He’s part of a group that wants to put a floating LNG import terminal on the NSW coast at Port Kembla.

If all goes to plan, it will be operational by 2020.

The development cost is in the range of $200–300 million.

This can’t come soon enough, as something needs to be done about Australia’s high cost of energy.

The irony is that some of the gas to supply NSW via this terminal could be coming from the United States. This is while Australia’s domestic gas supply gets exported from Western Australia and Queensland.

Still, it’s more infrastructure spending for an already hot market on the eastern seaboard.

Now all eyes will be focused on the major miners. After all, free cashflow is pouring into their coffers, but nobody trusts them to allocate the money appropriately.

The poor decisions at the top of the last mining boom haunt the industry.

This could be setting us up for a sustained period of higher commodity prices because a lot of new supply isn’t due to come to market at the same time.

Research from PricewaterhouseCoopers says capital spending from the world’s top 40 miners remains anchored at a 10-year low. This is despite the fact that profits and revenues are surging.

Higher commodity prices have other positive flow-on effects too.

A lot of weak real estate markets around the country are mining towns. These could see a lift if the resource industry comes back in a big way.

Keep your eye on the Perth real estate market as another way to play this.

But we’re mainly focused on the stock market here at the Daily Reckoning Australia

The world’s fastest growing economy is no longer China

Here’s a major point: Mid-tier and major mining companies can conserve cash for a while longer, but at some point capital spending has to rise.

Mines get old and deplete. New reserves need to be brought online simply to replace what’s being run down, let alone meet any demand growth.

That makes for a bright outlook for the natural resource industry…and the companies that service them. It’s an excellent time to be hunting for great projects from companies listed on the ASX.

And even though capital spending is low…it’s beginning to heat up…

For example, Fortescue Metals Group Ltd [ASX:FMG] announced last week that it’s going to spend more than US$1 billion on a new iron ore mine called Eliwana.

FMG doesn’t have much choice on this. Chinese buyers are demanding high-quality iron ore; FMG needs to find a supply of this or get cut out of the market. Its existing mines don’t make the grade.

We also have Woodside Petroleum Ltd [ASX:WPL] ramping up development of the Scarborough gas field off the coast of Western Australia.

Meanwhile, the Aussie gold industry is enjoying great margins, and the outlook for lithium remains upbeat.

Mining is not just about China anymore either. I keep a close eye on India.

Part of the reason for the strength in Aussie exports is that plenty of LNG and metallurgical coal is heading to the subcontinent.

Plenty more should be going there too.

The Financial Times reports that India remained the fastest-growing large economy in the first three months of 2018. It’s on track to hit 7.7% annual growth.

Granted, a weakness of the Indian economy is its dependence on foreign oil. So oil will need to stay reasonably priced for this forecast to remain on track. But for now things look full steam ahead.

Ultimately, we’ve got a pretty reliable barometer on the strength of the commodities rally: the Aussie dollar.

Previously, the interest rate differential between US and Australian yields played a more dominant role in influencing the exchange rate.

Since 2009, however, the dollar has become highly correlated with the RBA’s index of commodity prices.

Promisingly, the Aussie dollar is on the up again. It’s moved back above 76 cents.

All told, everything unfolding in the resource sector points to one thing: Resource stocks are going to keep throwing up profitable investment opportunities.

This article was originally published by The Daily Reckoning Australia

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