-- Posted Tuesday, 31 January 2006 | Digg This Article
I recently had the good fortune of making a trip Downunder to Perth Australia.
I’ve been a Gold Bug for a while now and wanted to take a trip to the umm ‘Coal’ Face to see first hand what was going on in the mining industry in Australia.
What I saw was both surprising and exciting!
Firstly, Perth is a top rate city. Beautiful waterfronts and beeches. Awesome weather (hot). And relatively cheap cost of living. Which all makes for friendly, healthy and laid back people. The City Center and most especially West Perth is littered with small exploration companies and producing miners. Every metal you can imagine is mined by these companies as well as every source of energy - oil, uranium, gas etc.
Some companies are listed on the Australian Stock exchange, some unlisted. Most don’t have dual listings. A veritable smorgasbord for the stock speculator.
It was absolutely no problem getting meetings with top directors, analysts and fund managers. As simple as picking up the phone. Which I found very positive and contributed to the success of my trip.
Generally speaking Australian mining companies trade at lower P/E’s to their Canadian cousins. I wanted to find out why?
It is immediately apparent that there is a total vacuum of young blood in the industry. I found most management to be 50+ (which was excellent to be able to speak to such knowledgably people). This helped explain the reason for the incredible skills shortage and rising labor costs.
The mining industry was all but decimated by the last 20 year bear market. The last 5 years has stirred only minor interest in the Junior mining sector. And whilst the general opinion is that we seem to be in a new bull market, there is definite skepticism as to its continuity and strength.
I wonder if this is not the psychological scars left over from 20 years of depressed trading conditions.
Everybody is aware of the China (and India) story and the feeling is that this will underpin the market for the foreseeable future. In my opinion, the effect of China and India is grossly underestimated by the Australian mining companies I met with.
There is almost no discussion that the precious metal bull market is being fueled by a blizzard of paper money creation.
All of this has helped to shape a market that looks very similar to the international mining industry. Large cap miners such as BHP and Rio Tinto have been almost the exclusive beneficiaries of the big moves in the resource sector. Admittedly they have the liquidity for the institutions.
And yes, there have also been some very decent moves in the Juniors. But there is certainly no excitement or euphoria surrounding the market!
By and large there is a HUGE segment of the market which is completely ignored by analysts. YIP, THE AUSSIE JUNIORS SPORT SOME VERY JUICY VALUATIONS.
I picked a handful of companies out of the research black hole and visited them personally.
The old hands tell me that the Australian resource stocks are traditionally slow to move on the upside and the downside which explains the general under valuation (I’m not sure I agree - from personal experience).
BARRIERS TO ENRTY
I think the real reason behind the general low valuation is the barrier to entry into the Australian Stock Market.
Yes, a diligent speculator can find an Australian broker and open an account without too much effort.
But its SO much easier to log on to your account online and buy readily available Canadian stocks. And there are more than enough of those.
I think Australian miners are aware of this and are heading for the AIM market in London and Toronto for dual listings. But there are a LOT whose focus is elsewhere rather then being concerned with dual listings – until they need capital that is!
In my opinion, the smart operator will cast an eye on the Australian market. It’s only a matter of time before someone puts together a diversified small cap fund listed in New York or Toronto (if it doesn’t already exist) that will cause a surge in liquidity in these issues and a commensurate revaluation in line with Canadian Juniors of the same caliber.
Greg Silberman CA(SA), CFA (Retired)
goldandoil@yahoo.com
I am a private investor in the resource sector.
Please visit my blog for more free articles and analysis
Click here: http://goldandoil.blogspot.com/
No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.
-- Posted Tuesday, 31 January 2006 | Digg This Article
