This Sector to Boom in 2018

This Sector to Boom in 2018

Do yourself a favour and start paying attention to the resource sector. There’s going to be so much opportunity in this sector over the next 18 months.

I don’t really understand why there’s no sense of excitement around this.

Gold in Aussie dollars is strong. Copper has a bright outlook. LNG spot prices hit a three-year high recently. There’s still a lot of interest around lithium.

This entire sector is strong…

This sector is a standout so far

Take a look at this graph, showing the recent earnings reports coming through.

Source: UBS

You can see pretty quickly that the resource sector is the standout here.

Your Daily Reckoning Australia service has made the case for this rebound since we launched in May last year.

There’s a pretty simple hypothesis behind it all.

The resource bear market from 2011-2016 wiped out a lot of exploration budgets across the entire sector.

Existing reserves are always being run down.

At the same time, we have the ongoing expansion of the middle class in China, India and Southeast Asia.

Demand won’t go away anytime soon. Supply now has a long way to go to catch up to where we need to be.

Because the lead times in mining run for years, not months.

That’s why car markers are scrambling now to lock up what resources they can of cobalt and lithium, even though sales of electric cars are minimal.

The supply needs to be locked in now to meet the demand coming.

We saw this in action on the ASX yesterday.

There was a whisper yesterday that Galaxy Res ources Limited [ASX:GXY] might be about to do a deal with BMW for a long-term offtake agreement.

The wider lithium sector rallied on the news.

Consider, too, what the arrival of electric cars could do to copper demand.

The major shift towards renewable energy is a huge boost for copper…but there’s huge doubts about whether the world is goi ng to be able to find anywhere near the level needed.

Copper grades have been declining for years. The most promising deposits are in Africa — not known for its investor-friendly environment.

Not only that, if the US$1.5 trillion infrastructure spend gets anywhere near to reality, that’s going to use a lot of copper. Plus, US housing is booming at the moment.

Plus, we have China’s One Belt, One Road initiative.

And people will tell you to be bearish on the world. Are they mad?

We don’t need to worry about them. Let’s just try and buy and sell the right stocks — at the right time.

Gold stocks are also looking strong at the moment.

The little knockdown on the Aussie dollar lately is actually a good thing for gold stocks, if they’re producing here.

We also have the threat of rising inflation spooking the bond markets.

Perhaps cash that might have headed into that market will seek a home in gold instead.

I’m not so convinced that gold is such a great inflation hedge over time. But plenty of people do believe it…and follow it up by buying and holding gold.

So, we might soon see some takeover action here too.

Actually, that’s true for the entire resource sector.

Certainly, Rio Tinto might just go on a little shopping spree…

Lots of cash and shrinking debt

Yesterday, ratings agency Standard & Poor’s upgraded Rio’s credit rating to ‘A’.

Two years ago, it was negative watch.

A lot has changed in the meantime. Rio’s debt has gone from US$18.1 billion four years ago to US$3.8 billion today.

Rio returned more than US$9 billion to shareholders in 2017, and may even beat that figure in 2018.

S&P says the big miner is now in a position to make a ‘sizeable’ acquisition if it cared to.

At some point, I expect the larger mining companies to start buying up promising juniors.

They cannot sit on cash forever, because they all hold wasting assets.

And there’s plenty of cash pouring in from the high price of iron ore. It’s close to US$80 a tonne.

That’s higher than anyone thought it would be last year.

China’s crackdown on pollution is proving especially profitable for iron ore miners with high-grade ore.

Even the relative strength in oil lately is helping BHP, as it works out what to do with its shale asset in America.

Volatility aside, 2018 is shaping up to be a lot of fun.


Callum Newman,

Editor, The Daily Reckoning Australia