Resources Boom: Making Money from Infrastructure, Exploration Shares

Let's just pretend the last two weeks didn't happen and move on. Yesterday's two percent fall in the ASX not only wiped out AU$32 billion in "wealth," it wiped out two weeks of gains for the market. Easy come. Easier go.

"Glancing at the All Ordinaries, it seems the ASX has been stuck in a sideways band between 6200 and 6400 since the start of May," writes Diggers and Drillers editor Al Robinson.

He continues, "Turnaround or continuation pattern? I think the next week will be important for the market, especially after yesterday's drop. A couple more days of downward movement and we'd be looking at a similar fall to February's in magnitude. A couple of positive days would mean the index has found support at 6200 for the second time, giving it momentum to take another crack at the 6400 mark."

Not one of the ASX's 14 industry sectors closed in the green yesterday. Yet there were nuggets of gold to be found. Shares of mining services and engineering firm GRD were up over 18% on a bid from larger infrastructure giant Transfield Services (ASX:TSE).

Earlier this week, Leighton Holdings (ASX:LEI) won a AU$500 million contract to help carry out coal operations for Custom Mining in Queensland. Leighton closed above AU$41 yesterday, double its January 2 closing price of AU$20.30. At yesterday's closing price of AU$10.75, Transfield is actually down 20% from its 52-week high of AU$13.47.

Is there still money left in infrastructure shares? There are two spending booms in the resource sector. The first is the exploration boom by mining companies looking to exploit high prices and locate newer, profitable reserves of base metals. The exploration boom favours the juniors, hence our focus on "diggers and drillers" at Outstanding Investments.

The other boom is the infrastructure boom. State governments that first underestimated the length and strength of the resources boom are now playing catch up to alleviate transportation bottlenecks. And aspiring resource companies like Fortescue (ASX:FMG) are finding foreign joint venture partners who are willing to help foot the bill for new infrastructure in exchange for long-term contracts which guarantee access to mineral resources from Australia.

So yes, there is still money to be made in both infrastructure and exploration shares. But the really low-hanging fruit has already been picked, blended, and consumed as a nice fruit smoothie. What's left now is honest-to-goodness analysis of which small and mid-size businesses have the managers and the capital and the resources to make a buck in the next three years. Harder work. But with many companies to choose from, and share prices under AU$10, it's worth doing.

Dan Denning
The Daily Reckoning Australia

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