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Jan 2006 - Year End & China

  • The main potential restriction to China’s growth appears to be insufficient raw materials in the world (based on what I could see). China is currently in 10-year Growth Phase 1 to 2010, when it is expected to accelerate into Phase 2 to 2020 (based on a presentation at China Mining 2004).
  • The top 3 performers by company have been Independence (IGO) up 2,364%, followed by Kingsgate at 1,573% and then Consolidated Minerals up 906% (based on share price appreciations since ERA’s first report less dividends).
  • I remain amazed that there is still a view that “the sky is going to fall” or “this cannot be a super-cycle” or “commodity prices have to fall if not in 2006, then definately in 2007 and if not in 2007, then it has to be 2008”, or “commodity prices are overdue for a correction because they should have turned down at the end of 2004 according to the historic world IP growth curve” or “China has to grind to a halt due to fundamental economic theory” – to anyone who makes these remarks you should ask “when was the last time you visited China ?”. Quite often the replies are either : “never; a long time ago; or I don’t need to go there because it is obvious what has to happen.” To those that haven’t gone, do yourself a favour, take a week off and go (Singapore Airlines return from Sydney is about A$1200) and make your own opinion based on first hand observations, otherwise much greater monies can easily be lost through taking the wrong stance.
  • It has been commented that nickel prices must fall because the nickel laterites have to be developed in order to meet demand, with a new nickel laterite mine required every year to meet demand expectations. But each 40,000tpa to 50,000tpa nickel laterite mine costs at least US$2bn to construct over 3 years or so, and then take up to 8 years to reach full capacity and require maintenance and sustaining capex of US$100m per year. That level of capex requires minimum levels of nickel prices to be viable, and Minara are still not quoting their cash costs.
  • This belief that commodity prices have to fall is the only rationale I can apply to the relatively weak performance of Australian nickel producers such as Mincor and Sally Malay during 2005 as shown in Table 1, which we believe are both capable of exceeding A$1 per share, with Independence capable of being well over $2 per share (a 70% appreciation on $1.18 = A$2.01). Both Consolidated Minerals (CSM) and Titan Resources (TIR) also do not appear to yet be receiving any consideration for their potential nickel production, but that could change over the coming year to December 2006.
  • Written by: Keith Goode
  • Tuesday, 03 January 2006

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