Australian Market Notes – 15 November 2006

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MELBOURNE AUSTRALIA, 15 November 2006 – For fear of labouring the point, and before you become bored of our references to it, we shall take one final look at the London Metal Exchange’s ‘Ringsider’ Metals 2006 yearbook. We’ve looked at zinc and we’ve looked at nickel. Both have gone berserk during the last three years. What about something that hasn’t performed quite so well?

According to Peter Kettle, research director at CRU, he believes that metal is Tin. As the headline for the article says, “Tin has been the poor relation of the LME metals in recent years.” It also points out that “By the middle of this year tin prices were only about twice as high as they had been at the trough of the cycle in 2001/02.”

Not bad on its own, yet “meanwhile, copper, zinc and nickel producers were seeing three-, four- or fivefold increases.” Part of the problem has been the practice of “substitution”, in other words using an alternative metal that could be cheaper and/or in more abundance.

However, Kettle is of the opinion that things are changing. He also believes that the tin surplus will be eroded over the course of the next year. He writes, “Last year tin supply exceeded demand by about 24,000 tonnes. In 2006, CRU estimated that the surplus will shrink to 3,000-6,000 tonnes, but not disappear altogether.”

That, my friends, is a big fall off in the surplus. Part of the reason is the question mark over supply especially from Indonesia, where Kettle believes that mines have reached their peak. He tells us from experience that “once a peak in small-scale mining is reached, it can be followed by a fairly rapid decline.”

Looking at Australia, China and Latin America, Kettle says that there are a number of sustainable tin mines, however, “the combined capacity of these falls well short of the current production coming from the Indonesian gravel pumps and suction boats.”

Finally, he suggests that “if there is a more rapid decline in Indonesian production than we have allowed for, tin might catch a late price wave and race after copper, zinc and nickel.”

The first Australian tin mining company we came across was Bluestone Tin Ltd (ASX: BTX). Looking at the recently released annual report, it appears as though it could do with some copper/zinc/nickel style price action. A loss of $22 million doesn’t make for pretty reading.

It does have active mines in Tasmania and North Queensland which it is hoping ramp up to full production. As with many investments, it is always tempting to try and find an industry or sector which hasn’t yet started its ‘bull run.’ Should metals investors stick with copper, or should they bail out and tuck into tin?

Speaking of earnings, we notice the comments from the Telstra (ASX: TLS) earnings forecasts that first-half earnings will fall by around 20%, yet for the second half, earnings will rise by approximately 40%.

Isn’t it funny how a company that has been suffering falling revenues in recent years is always able to predict an increase in earnings into the future. What makes them think that the environment for telecommunications is going to be any better next year than it is this year?

Dare we say that Telstra management is still in selling mode as they try to convince institutions that they should pay-up for the shares? We shall make a point of monitoring Telstra’s second half results next year.

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.
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