More Cash for Iron

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–How good is the commodity boom in Australia? It’s so good that traditionally cyclical stocks are becoming income stocks! You don’t have to invest in a reckless, risk-taking, mortgage-happy bank to earn a respectable dividend any more. You just have to buy Rio Tinto!

–Granted, Rio’s current dividend yield is barely over 1%. But the company is spinning out so much money that shareholders are beginning to wonder what it’s going to do with it. Cash from operations for the last full year was up 70% to $23.5 billion. That allowed Rio to clock in a $14.22 billion profit.

–Gee, if BHP’s profit results come in at around $30 billion like analysts are expecting (the half-year profit alone would be the biggest ever in Australian corporate history), the two could chip in and pay for the National Broadband Network all by themselves. It wouldn’t be the best use of shareholder cash. But whatever…the government can do what it wants (warning, contents of video likely to offend, much like coercive public policy).

–Rio’s tripling of its profits and BHP’s record results sure do bring back memories—memories of 2008 before the whole market cratered. Rio is the consummate big-cap iron ore player, with a solid left-jab coming from copper. It’s a great one-two punch.

–Copper prices were up 30% last year (just as the stock Doc predicted). Chinese iron ore prices were up 43% to $188 a metric tonne. It’s that kind of bullish price action in base metals that has Rio committing nearly $8billion to expand its operations in the Pilbara by 50% in the coming years.

–Iron ore makes up two-thirds of Rio’s profits. Expanding Pilbara production from 185 million tonnes to 333 million tonnes is how Rio CEO Tom Albanese plans to capitalise. Albanese has also said the declining ore grades at the world’s largest copper mines, combined with the gap between supply and demand, mean that 2011 should be another bumper year.

–Things are going so well for Rio that it increased its dividend by 40% to just to $1.08 for the full year. And last week it said it would buy back $5 billion in shares with its cash war-chest. This was designed to make shareholders happy by giving them a bigger piece of the cash flow action. In terms of capital gains, the stock is up 176% from its December 2008 low at $32.

–Rio’s investing money in new projects, giving cash back to shareholders, and buying back shares. To decide if all these measures made the stock more or less valuable…well to do that we’d normally turn to our value protagonist Greg Canavan. We’d want to know if Rio is buying its shares at a good price, or whether it’s better of sitting on the cash, giving it to shareholders, or finding projects with a high return.

–Of course the last bit could be the most worrying bit. What if a company’s managers can’t find suitable projects with high rates of return to invest in? What does that tell you about where we’re at in the commodity cycle? Hmm.

–The glass-overflowing view is that regular cash blowouts are the “new normal” for the big miners. This would mean you could expect share-price growth to be driven by organic growth and higher commodity prices (although maybe coming off the boil a bit as new supply comes on line in the next few years). Profits might be diminished by any number of factors (rising labour costs, a strong Aussie dollar, higher energy prices, and a carbon dioxide tax). But there’d still be profits.

–The lazy man’s way to mining riches, then, is to passively own the big boys as they play a historic role in the industrialisation of the world’s ancient civilisations (India and China). From a thinking point of view, this strategy is attractive because it requires no thinking. You don’t really have to do anything at all.

–Tomorrow, we’ll discuss why the lazy way to mining riches might be too lazy. Obviously the biggest risk of all is that mining companies haven’t suddenly become safe, boring, predictable utilities, but they’ve being valued that way now. Last time that kind of thinking took hold, the whole market got sideswiped by a giant demand-destroying financial freight train.

–And this just in from the Wall Street Journal! With Japan’s fourth-quarter GDP contraction, China is now the second-largest economy in the world. That leaves only the US to overtake. Japan’s 42-year run as number two is over. For good? Or just for now?

–Finally, there was a lot of outrage AND thoughtful feedback from our note last week about the enemies of nuclear power (and humanity). We can’t print them all. But keep ‘em coming.  Here are a few examples.

Excuse the (lack of punctuations and capitals)…..

Dear dan ( do you really have time or interest to read all your emails? )..oh well..

i usually like all the stuff you and others write about the stupidity of bernanke and how his flooding the world with money is gonna just blow up one day.  ok, so i believe you, even though as you often point out..”it hasn’t happenned yet”.  of course you like to say that inflation, however, IS certainly happenning.  but then the stock mkt and everyones 401 accts are also going up so..what’s the problem?  ah,you say…we’ll see !!!

and so then you do a very funny thing ( am i the only one that sees this?)  you make bold assertions about population and heartily put down anyone that thinks limiting population should be a priority.  bah humbug ! you say . the world population has multiplied into the billions. so what ?  keep pumping out those kids !!

don’t think of it as millions of people starving.  or rioting in the streets.  or losing their houses.  or any of the other “problems” you like to blame on the crazy ways of big ben.  because, as you so resolutely reassure us…. its more brains to solve the problems.   hahahaa   ok ben…i mean dan.

are you SURE about not being wrong yet ?  maybe you should slow down a bit….and give it a good thought.   i think you owe me a beer too  ;-)

–This is the first, and hopefully last, time we’e ever been compared to Ben Bernanke. Of course we could be wrong about the limits of growth. But human beings are not like dollar bills. Each new person does not diminish the value of all the rest.

Dear Editors at PPP,

I agree with readers that think way you guys are writing these days seems childish.

I’m losing interest and can rarely plough the DR and MM.

There is nothing wrong with the simple life, don’t you know it’s what you all yearn for.

That Nuclear energy / waste  is a high risk has been taught even to children for many decades, even before Chernobyl, even before China or Iran and even before Julia G was crying … of course its emotional.

Malthus was wrong and still wrong. Human genius has always had limits and if you begin to think we can solve everything even by adaptation or evolution then you will be like those who watched on as Noah built the ark or those who built the tower of Babel, like the investor who believes Sydney property prices forever go up, or those who believe that RIO will forever leap forward. Watch out, the crash is coming and on that day a piece of bread will buy a bag of gold.

See even I can turn out better text than what you guys are writing

Stick to researching stocks that’s what we pay you for!

Kind regards

Jona Gray

–Hmm. How do you know what we yearn for? And by the way, you don’t pay for the DR. It’s free.

Dan:

I have been following your writings since you were editor of Outstanding Investments.

I don’t always agree with the things you write, but I also don’t get upset when our opinions differ.

I have also actually read Thomas Malthus’s ‘Essay on the Principle of Population …’, more than once, and have delivered university lectures on the subject of environmental constraints on the growth of human populations and the circumstances that allow them to grow rapidly.

So, permit me to point out a few errors you made in your counter-attack on the environmentalists who dislike the idea of an Australian nuclear energy plan.

First, the growth of the human population for the past couple of millennia, not just since around 1800 when Malthus made his dire predictions, has NOT been arithmetic.  It has been exponential.  You should know the difference, and the ultimate physical limitations on exponential growth spikes with their decreasing doubling times.

Second, what Malthus, a rural clergyman writing just as the industrial revolution was getting underway, failed to foresee was not fundamentally the contributions of human ingenuity to increasing food production, but the emergence of the ‘Neo-Europes’ in North America, southern South America, and Australasia.

The amount of newly colonized arable land without already existing dense populations (excluding northeastern Asia but not Southeast Asia, but the latter places did not become ‘Neo-Europes’ for climatic and perhaps other reasons), provided greatly increased world production of staples of the European diet, alas at the expense of the indigenous populations in those regions.  Of course, improvements in 19th century transport technology (railroads and steamships) and horse-drawn agricultural mechanization, mainly developed in the US, played a role as well, but without all that new land to bring under the European plow, world population simply could not have increased sixfold in the two centuries from 1800 to 2000, even if technological innovation had been the same.

Third, you may also be wrong about the intractability of nuclear waste.  Existing, and basically still first generation, nuclear power plants, especially those that that breed plutonium, do indeed produce long-lasting and dangerous by products (plutonium itself is fiercely toxic to all life, as well as being radioactive).

However, new nuclear technologies are being developed, such as  ‘pebble bed’ air cooled reactors and miniature reactors the size of a cargo container that can be buried for their useful life of a few decades, which produce much less nuclear waste, not to mention Thorium cycle reactors which are much more benign than those that use Uranium.

So, both you and the other guy were factually wrong, at least in part.  However, given new nuclear technologies, I would have taken him up on the deal.

L. Crissman

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Ross
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Kiwi dollar spends the day averaging over 1.33. The Aussie four pillar currency swaps held with those bogus asset-less counterparties in order to support the 4 pillar NZ branches strain at their elastic limits. The RBA has at least temporarily lost it. AMP bank can’t even access securitisation for mortgages. 40% of AA rated 4 pillar AA loan funding comes from securitisation. No turn yet in ever lessening funding term profile of 4 pillar banks. Hybrid debt is destined to be banned by BIS and are frowned upon by bond markets who finally are putting pressure on rating agencies. Selling… Read more »
Lachlan
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Everyone has opinions. They’re bound to differ. And change with time. Good on you Dan that you make space for people to express their different opinions…and in keeping with your beliefs regarding free markets etc. I have my own views on money, inflation and freedom etc which are becoming commonplace on the net. Sort of like a new religeous movement. Many good opportunities are lost to create interesting debate in many venues. The new group becomes too intolerant of other opinion. True, some people participating may not be genuine. However many have good arguments which are interesting and helpful for… Read more »
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