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Iron, China and African Gold

The stock market rally may already be over for Australia,. BHP Billiton (ASX: BHP) is down 14% from its February high. Iron ore rival Rio Tinto (ASX: RIO) is down 19.1%. You wouldn’t expect either of the miners to lead the market higher based on the projections of the government’s commodity forecaster. The forecaster (which has such an absurd and ever-changing name that we’ve stopped typing it) says iron ore prices are likely to fall to $90 per tonne over the next five years. That’s a 32% decline from the current spot price.

The spot price of iron ore shipped to China is already down 14.2% in the last month. Brokers are lining up with lower forecasts based on over-capacity in the Chinese steel industry. All of this is either good news for contrarians who like to buy assets that are cheap and hated…or a validation of Greg Canavan’s thesis that China’s financial sector is on the verge of a controlled demolition that will send aftershocks rolling through the Australian share market.

It’s a good thing Diggers and Drillers editor Alex Cowie isn’t around! He’d be firing back with his counter argument about a new leg up in the resource bull market. Alex is in Hong Kong trying to figure out where the Chinese are hoarding all their gold. He sent this note from a conference he’s attending:


‘I made sure not to miss the unmissable Robert Friedland talk this morning. He promoted his Ivanplats Ltd [TSX: IVP] company. I need to take a closer look at this, but if I got the right end of the stick he has some monumentally big projects, or ‘disruptive’ projects as he called them.

‘The main one is a platinum, palladium, rhodium, gold, copper, and nickel mine in South Africa that he described as being bigger than the world’s two gold companies – Barrick Gold [NYSE: ABX] and Newmont [NYSE: NEM] – put together. He’s not one to talk things down! Whereas the width of the average platinum seam is a metre, he described this as being 20 metres thick.

‘He goes on to say it’s the largest precious metals asset globally for a hundred years.

‘The other two mines in the group are a copper project and a zinc project in the Democratic Republic of Congo. Both sound immense. I don’t know how he does this – find all these ridiculously big assets all the time.
‘He’s the one that got the Oyu Tolgoi mine up and running (with some help from Rio Tinto) in Mongolia.

‘He’s also bullish on Sub-Saharan African growth in the next decade. He says it could resemble the China story in terms of urbanisation and industrialisation – leading it to being a source of demand, not just a source of commodities. Ethiopia, Mozambique, Tanzania, Congo, Ghana, Zambia, and Nigeria should all be in the top ten countries for the first half of this decade.

‘Interesting stuff.

‘Ethiopia – who’d have guessed that was the third-fastest growing economy in the world? It’s also where China built the new African Union building, and has seen a great deal of foreign direct investment from China. Maybe connected?

‘And when asked about South Africa or Democratic Republic of Congo as risky places to do business, Friedland said he’d rather be there than Australia. He said, ‘do you trust that redhead?”

We’d heard about the Chinese investment in Africa during our last trip to South Africa in October. The story is that the default language in the African Union general assembly is not English or French. It’s Mandarin. And that IS interesting.

Regards,
Dan Denning
for The Daily Reckoning Australia

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