There is another candidate for "largest Chinese investment in Australia ever." But this time, it involves an asset that is arguably more strategic than oil and more precious than gold. But before we get to that little drama in the Australian share market (and the five-year opportunity it represents), spare a thought for gold.
In fact, spare a whole weekend for it! You have may have missed the weekend edition of the Daily Reckoning. If you did, you can read it here. While regular editor Alex Cowie was sunning himself in Queensland, we took the opportunity to tell you about what should easily be Australia's premier conference on gold.
Yes, we know it's being held in Canberra from November 2nd to the 5th and that it's during Melbourne Cup week. If you can't make it then, that's fine (hopefully there will be a transcript or a video recording). But it should be a great show.
The headliner of the event is Professor Antal Feteke of the Gold Standard Institute. Bron Sucheki from the Perth Mint will be there as well, along with Barry Dawes from Martin Place Securities and yours truly from the Daily Reckoning.
Of course we know a whole four days talking about gold as money and gold stocks isn't for everyone. But then, everyone couldn't fit anyway! The venue only holds 160 seats and they are already selling. To find out more contact conference organiser Dr. Marcus Matthews, who is coordinating the event on behalf of the Gold Standard Institute. He can be reached at feketeaustralia@gmail.com.
And if you're reading today's letter from somewhere that is not Australia, maybe you should consider coming to visit. Our old friends at Opportunity Travel (with whom we went to China in 2004) have organised a tour of Australia and New Zealand from January 14th to the 29th, including stops in Sydney, Melbourne, and Auckland (where they will visit with mining guru Rick Rule).
There's much more on the agenda. Some of it is business and some of it is pleasure. If you're an American, it might be a good way to enjoy the purchasing power of your money while it lasts, before the rest of the world stops taking it seriously. Joining and leading the tour is another old friend, Chris Mayer of Capital and Crisis. Your editor will co-sponsor the Melbourne leg of the journey, and perhaps shout the whole group a round at the Prince of Wales across the street.
If you want a look at the full day-by-day itinerary, e-mail Barb Periello at info@opptravel.com or (from the States) call her toll-free at (800) 926-6575 x 104 or direct at (561) 243-6276 x 104. Barb says the program is already more than half full, so if you're interested in learning more, please get in touch today while there are still a few spots available.
Before we leave the subject of gold altogether, we had a chat about it on the phone yesterday with Neil Charnock, editor and entrepreneur behind www.goldoz.com.au. Neil said his charts were telling him that the bullion price is ready for a move. We asked him if the stocks confirmed that move...or if they led it...or lagged it."
"A bit of both. It depends on if you're looking at the majors or the juniors. But overall, the gold sector behaviour is pointing to a very positive run ahead in the coming months. The big caps ran up hard after October last year and have traded on a high plateau ever since. It's possible they're just getting slapped about by the funds taking profits as they play the range."
"Hmm. What about the smaller ones?"
"Well a lot of them were pushed down to crazy valuations late last year. But they've been running ever since. Overall, the technicals are telling me that time is running out before the large cap train leaves the station. When you combine this with the smaller cap behaviour you get an obvious sign that gold will break out in the coming weeks and the gold stocks will perform strongly. The last time I saw this type of broad based gold stock action was mid 2005."
Okay. One last note about gold, albeit indirect. World Bank President Robert Zoellick (an American) shook his countrymen by the shoulders yesterday. "The United States would be mistaken to take for granted the dollar's place as the world's predominant reserve currency," he said. "Looking forward, there will increasingly be other options."
So back to the beginning. What asset is more strategic than oil and more precious than gold? Why arable farmland of course! That was the conclusion we reached yesterday when putting the finishing touches on a report that details the growing number of Sovereign Wealth Funds and corporations buying up vast tracts of farmland in Africa.
It's been dubbed the "New Colonialism" by some, which is a politically loaded term. But then, land is the sort of the asset that could easily become politically loaded over the next twenty years. A lot of people want (need) arable farm land. Not everyone has it.
You may be wondering what this has to do with the $2.8 billion bid by China's Sinochem Corp for agrochemical and fertlisier firm Nufarm. That's just the question we've been mulling over. If it goes through, the deal would be China's largest acquisition of an Aussie asset to date.
But there are some questions to be answered first. Will the Foreign Investment Review Board (FIRB) block the deal? Is it a good value for Nufarm shareholders? Are there more stocks like Nufarm you should know about?
We can't see any reason why the FIRB would block the deal. But then, if it thought about it, it might. Nufarm doesn't own arable land, mind you. And most of its sales are generated outside Australia. But it's not a stretch to call fertiliser and agrichemicals "strategic assets" either.
Is it a good value for Nufarm shareholders? Sinochem is offering $13 a share. That's a slight premium to yesterday's closing share price of $11.96. The bid values Nufarm at about $2.8 billion. It's closer to $4 billion when you include the nearly $1 billion in debt Sinochem will assume if it takes Nufarm over.
That might seem generous, considering Nufarm's shares slumped all the way to $8 earlier this year. The company has endured three profit downgrades this financial year. Prices for its main product, glyphosphate, have fallen 50% since the credit crisis. That caused Nufarm to write down $63.5 million in inventory when it announced annual results yesterday.
But in 2007, another Chinese firm offered closer to $17 per share. That was based on a much more optimistic earnings forecast and higher glyphosphate prices. Yesterday's proposal, we reckon, is more than what you'd pay based on the company's recent financial performance.
But it's probably less than what you'd pay if you had a bullish outlook on the business for the next, say, ten years. As for the last question, are there more stocks like Nufarm you should know about, the answer is yes! More on them later this week.
Dan Denning
for The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Justin on 29 September 2009:
Not so much to do with arable farmland, though I agree with the article, but hot off the (Business Spectator) press;
RBA sees risk of house price bubble!
Richards warns construction lagging behind record population growth. 1:18 PM
You real estate speculators really need to take heed, and double down. I can't possibly see how the RBA could be wrong.
Comment by Ross on 29 September 2009:
I have not been a believer in the Nufarm business model. It is a marketing and supply chain business built of a huge no. of acquisition of bit players in disparate markets. These companies continue to be mostly run by legacy managements that are trying to retain their strategies (as they need to do to keep in tune with local events & conditions in their respective markets). NUF's supply chain model has obviously proved to have been inadequate and it didn't understand the massive punt it was taking on inventory. This is not a global business that is ever going to hum easily and it needs smarter heads running it to a German styled multinational business model just to hold up.
Comment by Coffee Addict on 29 September 2009:
Hi Ross. I don't hold NUF but if I assume your analysis is correct a fresh broom put through the place would creast significant upside potential. A takeover may just be what NUF shareholders and customers need most. I certainly hoe that the Marc Faber clique is wrong concerning upcoming economic prediction but I fear protectionism will prove them correct.
Do you have any thoughts on Chinese investment? The best way to influence Chinese political developments over the coming decades is, I believe, to establish an underlying level of trust cooperation and commercial openness. Clearly the Chinese Government needs help to establish a better codified business framework but it ain’t going to happen within an environment of bilateral paranoia, protectionism and blunderbuss politics.
Comment by Lachlan Scanlan on 29 September 2009:
"But it's not a stretch to call fertiliser and agrichemicals "strategic assets" either."
My word its not. You can grow "some" food without modern ag. imputs (fertilisers, insecticides etc)but the best part of a population will starve before we adapt (..going agrarian).
Comment by Ross on 30 September 2009:
CA, I agree re China. We have been capricious. The worst thing we have had happen is to let ex foreign affairs staffers like Downer and Rudd get into senior positions in cabinet, let alone prime minister. These hacks have no respect for democratic institutions and are concentrated on form rather than substance. Since Gareth "Biggles" Evans we have had foreign affairs increasingly lauding it over trade and the building of mutual respect with China. In the 70's/80's we had Fraser and Hawke who knew a thing or too about human capital and substance no matter their other frailties. We built solid human ties with China until about the time we got that git Garnault involved too and then Hawke went ridiculous supporting the crushed far left wing student block's attempted push at Tiennamin that tried to get back their automatic rights to cadre jobs that they lost and reinstitute food price controls those same removal of them that has done so much good for China's rural reform and development since. The only game we have played properly is Taiwan. Tibet and now the Uighurs has been a Hollywood narrative written by a Yale Law School dean who got outed recently having insurrectionist black funded that Beijing "human rights" lawyer .. oh well at least the lawyer got done for Chinese tax evasion on the black money. Maybe if we roasted a Melbourne film festival director and sent the entrails to Beijing as appeasement we might turn things around a bit.
The Chinese may be a bit impatient and they do get chauvinistic at times but we can't stop ourselves throwing liberal fascist mud at them to allow something better to develop. We don't want them to own the mines outright like both we and they do in South America and Africa but they will deal if we play a straighter game on our side and stop pretending we have to be compelled to follow every US dirty trick campaign let loose. I couldn't help but laugh when the Indian's turned liberal fascism on its head and aimed the gun at us. Now India and their aircraft carrier intentions I don't trust and that too is why we need deeper chinese investment here over the long haul.
Comment by Ross on 30 September 2009:
CA, on NUF, China hasn't shown great form in the services & marketing multinational business arena. The trouble with makeovers for anyone reforming NUF is that culture change or any attempt at micro management from head office may mean massive revenue leakage. They need to start with systems and supply chain control but that won't be easy either when the consumer wants security blanket stocks (big orders) as prices rise and just in time as prices wane. I have been involved in a 75% global stretch services industry business with a similar headcount from a head office perspective and the cultural understandings need to be built up over time, and we avoided growing by acquisition too which made corporate culture easier to instill.
Comment by Coffee Addict on 30 September 2009:
Ross. Fixing a major supply chain is actually something I could do. It would be really interesting. (An NUF consulting fee would, I guess, exceed my current salary by several fold).
Like Rudd, I have travelled to China with an official passport "once apon a time". Unlike Rudd I was "edged" out for straight talking on a range of issues (Downer's flunkies never wanted to hear anything negative - be it AWB activity, failed computer systems, arrogance towards the Chinese, poor accountability, failed project models and outcomes etc. etc)
Cheers
Comment by Charles Norville on 1 October 2009:
I'm good for Aus to believe that the recession is over and we can get into some real nation building, but what's even better is that we can have other nations do it for us. I'm changing my user name to "tar and feathers"
Comment by tar and feathers on 1 October 2009:
And further more I can't visualise how gold can be so important when the things that you need to purchase for living can be traded with a variety of currency standards.........people are wanting to own stuff as a hedge because they see that Govts as shonky, when is the next downturn??
Comment by Flawse on 1 October 2009:
I do a lot of business in China. Perhaps I am even an 'old hand' these days (unfortunately) as I have been going there 3 or 4 times a year since 1985. The one thing I know about them is that they are very big on 'relationships'. You build a relationship and then we can talk business. You cannot do business with them without a 'relationship'. Once you have a relationship anything is possible. It's a matter of trust with them. I don't think Aus has helped itself lately on the 'relationship' front.
That having been said, it is a tragedy that we are driven to sell off all our resources and major companies at a frantic pace just to stay afloat. It is a tribute to the mismanagement of the Australian economy for the last 50 years. It gets worse every year under all political shades. The next election time horizon always rules.
Comment by Mike on 4 October 2009:
Back in July I was at a mixer talking to some lawyer (I live in Illinois, USA) and he was telling me that he represented US investors who were buying (primarily) agricultural land in Australia. My reply was along the lines of: makes sense, when the drought eventually breaks the value increases and in the meantime you're paying almost 0% for your money.
Comment by Biker Pete, Vancouver, B.C., Canada on 4 October 2009:
Drought, Mike? We're told it hasn't stopped raining in WA this year. It was only a matter of time before US intelligence found us on a map!
We really are the best-kept secret south of Nova Scotia!! 
Comment by tar and feathers on 4 October 2009:
Aus does not have a food security policy, land for agriculture is second to mining.