“Bill, what do you think of the story about iron ore? It shows how the history of the Pilbara is just a prelude to a more fantastic future. Did you like it?”
We’d sent a note back to the Godfather of the Daily Reckoning, Bill Bonner, to ask him about our latest research in Outstanding Investments. It’s about the future of the iron ore boom in WA and the best way to invest in it. It will be out Friday for paid-up subscribers. For some reports, we like to get the boss involved before it hits the printer, to see if we’ve missed something. And apparently, we did.
“There’s nothing wrong with it, in theory. But you may have missed a big idea. A very big one. It’s a simple one, which is probably why you missed it. It’s even more intriguing than how you’ve told the story.” What is the intriguing idea?
“The idea that the factories of China…and by extension…all of China’s exporters…and by extension, the whole of Asia’s economy…and by extension, the whole Mega Boom in which trillions of dollars worth of wealth are migrating towards Asia…well, the idea that it all depends on a few sun-burned blokes in the lucky country wandering around various god-forsaken regions of the outback……and that if you got on with one of them in the early days…you might be the luckiest bloke alive!”
That is, of course, the simple but big idea behind the new companies scrambling to get a piece of the Pilbara pie and send it to China.
Those who invested alongside Andrew Forrest when Fortescue (ASX:FMG) was a 41 cent stock are definitely lucky blokes. Fortescue is now an AU$36.25 stock, with a market capitalisation of nearly AU$10 billion. And it still hasn’t shipped a single tonne of Christmas Creek iron ore to China, and may never do so.
But we shouldn’t be too hard on Fortescue. It’s trying to open up a new area of the Pilbara to production. It’s using a surface mining technique borrowed from the coal industry. And it’s trying to build a whole new rail line to get the ore to the coast. Meanwhile, despite huge operational advantages, even the grand-daddy of Pilbara iron ore is having trouble feeding the maw of the North.
“The market is extremely tight,” says Sam Walsh, Chief Executive of Rio Tinto’s (ASX:RIO) Iron Ore Group. “Quite frankly, we can’t meet demand.” Ah, so this is why Rio is trying to expand iron ore production by 50% in WA. And this is why analysts are forecasting a 40% rise in iron ore prices over the next two years.
The Daily Reckoning Australia