A ‘Punters’ Paradise’ Could Be Coming to the ASX

A ‘Punters’ Paradise’ Could Be Coming to the ASX

Hear that?

That’s the sound of Australia’s mining sector really starting to rev.

And about time too.

This is just the thing we need to drown out the endless shrills of the bears, doomsayers and pessimists.

I’m bored of listening to them.

Hear this now: The next 18 months are shaping up to be a punter’s paradise in the market.

I’m so convinced of this that I’m leaving the Daily Reckoning Australia!

Not straight away, mind you.

From August, the Daily Reckoning Australia will return to its roots as a haven for gold bugs and libertarians. Shae Russell and Jim Rickards will steer the ship.

As for me, stay tuned. I’ve got something exciting in the pipeline that I can’t wait to share with you.

For now, I’m hijacking the Daily Reckoning for this week. You’ll learn why in the days ahead.

But here’s a clue: I suggest heeding the signal from the tidy gain shareholders in Sino Gas & Energy Holdings Ltd [ASX:SEH] saw last week.

If you didn’t catch the news, Lone Star Funds, a US private equity group, is proposing to acquire Sino Gas & Energy.

Sino is a gas play that operates in China. Its shares are up 30% since April.

This was right on cue.

In the latest issue of my advisory, Small Cap Alpha, I suggested the mining industry is entering a strong period of mergers and acquisitions activity.

I listed off a long line of deals we’ve already seen in the market. And I expect plenty more.

So does Citigroup, which came out last week saying it expects to see mergers and acquisitions boom.

This goes alongside a strong market for exploration and robust commodity prices.

Business in this regard is booming in Western Australia. Gold and lithium explorers are poring over the state looking for the next big deposit.

What’s more, I attended the Resources Rising Stars conference in Queensland last week.

One of the chief executives presenting made the offhand comment that he was lucky he could get a drilling crew to his site. They’re in hot demand.

More importantly, a second presenter made the point that explorers are raising a lot of capital — and getting to work.

Point being: They’re going to start finding commercially-viable deposits.

The good news for punters is that Australia is leading the mining charge relative to the rest of the world.

Canada and the US are not quite as hot in that regard.

That’s because the mining industry in Australia is getting a strong tailwind from the Aussie dollar.

For example, gold in US dollars is $1,297 an ounce.

However, in Australian dollars, it’s at $1,711 an ounce.

That’s a big difference.

Not only that, but the world is seeing good growth and rising inflation.

Make no mistake: This is going to play out in the commodity markets.

If you listen to what people inside the industry are saying, costs are going up.

That’s because a lot of open-pit mines are coming to the end of their life, and the operating company is either heading underground or elsewhere.

What’s more, grades are declining around the world, resulting in more digging and the use of more diesel and explosives.

It will also push miners to continue to automate more of their processes wherever possible.

The world may indeed be in a technological revolution with Facebook, Amazon and Apple dominating. But don’t forget that modern life runs on the huge natural resource industry providing the raw materials for it all.

Strong commodity prices are likely to give existing producers good cashflows, which can be reinvested in leases, used to acquire smaller players or enter into joint ventures.

The really big miners like BHP Billiton Ltd [ASX:BHP] and Rio Tinto Ltd [ASX:RIO] may help push the ASX 200 up this year.

But the main action will be in the mid-tier and junior companies.

You see, the major mining companies don’t spend a lot of money on exploration in terms of percentage of revenues.

For now they’re paying down debt, dishing out dividends and pandering to shareholders.

That’s left the burden of the value creation in the industry to the smaller firms.

Here’s the problem with that: The mining downturn from 2011–2016 cut a lot of funding from these small guys. That meant the work never transpired.

Of course, you won’t find anything if you don’t look. And you can only look if you can pay people to get out there.

It was a brutal bear market. I had a friend who covered the mining industry for part of it. No matter what commodity he tried, any stock suggestion was butchered. The entire sector got routed.

Things have changed now, as I’ve noted. But it created an exploration ‘deficit’.

For all those years of weak exploration, the world kept consuming copper, oil and zinc.

This has set the commodity markets up for what could be an extended bull run.


Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia