Agora Financial’s Rude Awakening

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Melbourne, Australia

• The other “China plus one” strategy and how to get involved,
• BHP Billiton soars 367% in four years…and she’s only getting warmed up!
• Where on earth is Pilbara? Home of a mammal-reptile hybrid and plenty more…

Joel Bowman, reporting from Dubai, a long way from his home Down Under…

The “China plus one” strategy is one investors have been using to avoid the mad rush into the world’s most exciting boom story while still availing themselves to the growth prospects of the waking dragon. The “plus one” idea simply entails picking a neighboring Asian country that is well positioned to ride on China’s coat tails as the behemoth scorches across the global investment landscape. 

It’s no secret that the world is witnessing the largest socio-economic migration in history. Some 300 million new middle class citizens (equal to the entire population of the United States) are now demanding beef instead of rice and flashy apartments in the city instead of drought-ridden farmland in the countryside. Obviously, someone is going to have to build and power those cities and provide the raw materials to fuel the voracious growth.

People look at Vietnam, Thailand and Laos among other markets as those that are best positioned to benefit from China’s mammoth surge. But there is one market, a Western market with all the natural resources China can swallow, that has been largely overlooked.

Antipodeans know the place as simply “The Lucky Country.” Australia boasts a modernized economy with a mature and relatively stable political framework and, above all, some of the largest deposits of metals, minerals and other subterranean goodies the world has to offer. 

In the column below, Dan Denning, who relocated to Melbourne, Australia, a few years back, talks us through the ins and outs of what he calls “the single best resource stock in the world for the duration of this commodity boom.”

Can’t beat that? Not on your life, mate. Enjoy…

—– The Ultimate China Play: Australian’s “Pilbara Secret” —–

Bloomberg reports: “Even the tech boom of the late 1990s pales in comparison…”

‘Pilbara Profit Secret’ Turns $5,000 Into $1,025,150 In 4 Years

It’s already sent one 27 cent stock to $55.63…

Starting no later than June 30, 2008, the “Pilbara Profit Secret” could propel SEVEN
MORE unknown small caps to stratospheric highs.

Read on to get a ‘ground-floor’ piece of the action Right Here.

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The Iron-Clad Platypus
By Dan Denning

China is not buying T-Bills. It’s buying mining projects and companies…often Australian mining projects and companies.  American investors take note: follow the money…to Australia!

You may be under the impression that the animal best representing the spirit of Australia is the Kangaroo, or, perhaps the Koala. This is a common mistake. And you can also scratch off the Tasmanian devil, the great white shark, the salt water crocodile, and the infamous dingo from your list.

The animal that most accurately represents Australia—at least economically—is the platypus. The duck-billed, egg-laying, beaver-tailed, venom-dispensing Platypus is a freak of evolution. It is part mammal, part reptile, and all oddity. You could not pick a better animal to illustrate Australia’s strange, but privileged, position in the global economy.

Like America, Australia has a housing bubble in a prolonged process of deflating. And like America, Australian consumers have binged on cheap clothing and electronics from Asia with credit cards. But unlike America, Australia’s resource-rich outback is playing a starring role in the greatest industrial revolution of them all: China’s.

BHP Billiton, the Melbourne-based miner of everything, is the blue chip of the Australian mining sector. I first ran across BHP in 2004, looking for a safe way to play the China-driven resource boom. I’d seen the action firsthand on a trip to Perth in Western Australia the year before. It looked like a good bet…and so I recommended it to my subscribers.

Four years on, it’s working out pretty well for anyone who acted on the recommendation. The stock is up 367%. BHP continues to be, in my humble opinion, the single best resource stock in the world for the duration of this commodity boom. Don’t even ask me about BHP’s exposure to the rising oil price. The company rates as the 25th largest oil producer already and has two projects in the Gulf of Mexico coming on-line in the next two years that will add another 200,000 barrels per day to its production.

Not surprisingly, therefore, rumours are flying that a Chinese company—Baosteel, Chinalco, or some other state-backed enterprise—is looking to take a large equity stake in BHP. Whether China Inc. wants to take a blocking stake in BHP (I’ll explain why in a moment) or whether China just wants to ride the iron ore profit express, is anyone’s guess.

But it wouldn’t be the first time a Chinese company has bought into Australia’s booming resource share market. And I can guarantee you it won’t be the last.

In an over-night raid in London on the last night of January, China’s Chinalco (along with Alcoa) pulled a major coup and bought 9% of dual-listed resource titan Rio Tinto. And just a few weeks ago the first ever hostile takeover of an Aussie company by a Chinese company took a big step forward when Sinosteel’s $1.26 billion offer was accepted by the board of iron ore producer, Mid West. 

Of all the booming commodities, iron ore is the most primitive, the most reptilian if you will. The world’s great boom begins with the red ore in Western Australia. You can’t have steel without iron ore and coking coal (another big Aussie export to China).

The bones of an industrial economy are made of steel. And the bones of China’s industrial juggernaut are made increasingly from Australian iron ore. What the Mesabi iron range was to America’s industrial might, the Pilbara is to China’s industrial power.

In the last eight years, China has quadrupled steel production from 100 million tonnes to 500 million tonnes. China now produces five times more steel than the U.S. does. It is the world’s largest producer and consumer of steel. This voracious demand for iron ore has driven the iron ore price up 320% since 2003, even more than gold’s 147% rise in the same time. Is it any wonder analysts here are calling iron ore the new gold?

I’d like to tell you I saw it coming. But after moving here in late 2005 to track the resource boom first hand, I think I underestimated the length and strength of the boom. I originally moved here because I believed the commodity bull would last at least another five years. But the boom might continue a little longer than that. In fact, it seems to have intensified this year.

There are more resource stocks than analysts in Australia. Some of these companies have attractive assets on the balance sheet. The market value of those assets is going up, though there might not be any analysts around to notice it.

Chinese, Japanese, Korean and even Russian companies are on the ground in the coal-rich Bowen Basin in Queensland, looking lately for coal-seam-methane. You’ll find them looking at the mineral sands and bauxite deposits of the North Perth basin, or off the coast of Broome in the North West looking for oil and liquid natural gas, or even in the old gold fields of Victoria just north of Melbourne, where Australia had its first gold rush.

Of course let’s not forget that today’s mineral boom is still cyclical. You might even call it super cyclical. But there’s something else you should know: an evolutionary change is taking place in certain resource markets that’s leading to an incredible investment opportunity.

Until recently, the prices for bulk commodities like iron ore, thermal coal, and coking coal were arrived at via annual or regular negotiation between buyer and sellers. There wasn’t what you’d call a deep and liquid market to set a price, so the key buyers and sellers met in a room once a year to do just that.

But the huge structural shift in Chinese and Indian steel production and consumption has completely altered the markets for coal and iron ore. There are many more buyers. This creates an opportunity for many new sellers beyond BHP and Rio. And as you might guess, a whole new crop of junior ore companies, mining service companies, and other base metal juniors has sprung up to meet demand.

However remnants of the old, cozy relationship between a few Aussie producers and Chinese steel producers remain. The biggest remnant is a pricing system that does not reflect the market value of Aussie assets. But that is about to change, or evolve if you prefer.

Australian steel producers are asking for at least an 85% increase in the iron ore contract price for 2008. China’s producers—represented by Baosteel—have already agreed to an 81% rise in ore purchased from Brazilian giant Vale. But fearing a permanent shift in pricing power away from China and towards Australia, the Chinese have balked at the Aussie position.

That is where we are today. Australia and China are now in stalemate. The new contract price was supposed to be set by May 1st. That date has come and gone and neither party is budging.

Make no mistake: The emergence of China as an industrializing powerhouse has led to a structural change in how bulk commodities are priced. BHP and Rio have already suggested that the annual negotiations be replaced by an index that tracks spot prices. Naturally—because it means much higher prices—the Chinese have resisted this move.

But several new indexes are on the way regardless. One will be launched in the third quarter of 2008 by the folks who run the Metal Bulletin. It will be called the Metal Bulleting Iron Ore Index. Steel Business Briefing will also launch its own index later this year. Both indexes will play the same role that similar indexes play in the coal market, where prices are determined by a mix of spot and forward sale prices.

In simple terms, the industrialization of the Chinese and Indian economies has created liquidity in the coal and iron ore markets where none existed before. This has had two major and beneficial effects for American investors. First, it’s led to higher resource prices, delivering outstanding earnings and share price growth to multinationals like BHP.

Second, and more intriguing from my perspective, are what higher resource prices and more buyers mean for the long list of junior mining companies in Australia who want to take part in the boom. You now have companies sitting on smaller, but highly economic, deposits of iron ore and coal. The customers are there. The ore is there. But in many cases, the share prices don’t reflect the increased market value of the ore in the ground. At least…not yet.

The rest of this year will see a steady revaluation of existing major ore producers.  And at the ground level, you’ll see the frantic asset grab continue, as all the interested parties scramble for their stake of the resource bonanza. Australian stocks—the big ones and the little ones–are in prime position to benefit from the century of the Dragon, which also happens to be a reptile (if there be dragons, that is.)

Not bad for a platypus, is it?

[Joel’s Note: I had a chat to Dan a short while back to ask him, a) how he was enjoying living in my home country and, b) if he could share with us a unique way to play the Aussie resource boom. Dan shot me over the draft of a report he was working on, promising to forward the completed version as soon as it was finished. If you’re interested in playing the ultimate backdoor Chinese resource story, Dan’s found the perfect way. I’ve included his full report here for your perusal right here.

—- Investing in the Era of “Peak Everything” —-

Oil hit a new record high… Gas could soon be $4 a gallon… silver, wheat, corn, you name it — all the “resources” of daily life are soaring in price!

Yet there’s a way to protect yourself and profit in the days ahead…
 
Join Us in Vancouver in July for an Exclusive Look at…

A View From The Peak : Seeking Profits in a Time of Risk and Scarcity .

Reserve Your Spot Here .

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Rude Endnote: Usually your sometimes-homesick editor would insert a gratuitous reference to his homeland right about here. But we won’t today. Instead, we’ll just say, until tomorrow…

Cheers,

Joel Bowman