Should I Be
Investing In Australian Mining Stocks?
Greg Silberman
April 10, 2006
About a year ago I decided
to open an office in Sydney Australia. I run a little advisory
business in Atlanta Georgia and my thinking went like this:
We're in a Commodity Bull Market
for sure!
Australia is packed FULL with every commodity under the sun.
There are regions of Australia which haven't even been EXPLORED
yet.
If the action is going to be in commodities and I want a piece
of the action, I need to get a foothold on the Continent DOWNUNDER!
My wife laughed at the idea.
She thought I wanted to Surf and watch girls on Bondi Beach.
My wife is very perceptive!
Needless to say it's been a
tough year shuttling back and forth but immensely rewarding.
Let me save you a year of Trans-Continental travel and fill you
in on the Australian Commodity story.
Here's what you probably
know about Australia:
- Australians are pretty switched
on people. Fiercely competitive and born Winners. There is no
Sport in which they participate and don't totally Dominate!
.
- Australia has a landmass comparable
to the United States yet a population of only 20 million, the
majority live at the coast.
.
- Australia is a First world
country with an extremely stable political system and well established
judicial system. Australia is a VERY Law Abiding country.
.
- Australia is English speaking
(although you wouldn't always think so based on the accent) and
a first class ally of the United States.
.
- Jim Dines of the Dines
Newsletter who calls himself 'the Original Uranium Bug' recently
commented that Australia is about to go through its most massive
BOOM EVER because it holds 40% of the worlds Uranium reserves.
.
- The Australian Financial Review
- a brilliant daily newspaper recently ran an article entitled
- Australia, Number 1 Gold Producer in the World.
.
- Australia is the only English
speaking country in the Asian time zone and geographically on
China's doorstep.
Ok, so much for Trivia.
Tell us something we don't know!
Sure.
Here's what you probably
don't know about Australia:
- Australia is HIGHLY REGULATED.
Society borders on being socialist - Medical is practically free.
The result is that the government meddles in every aspect of
life and one can get tied in knots by rules and laws (much the
same as the USA). Figure this one out, it's a law that you have
to Vote in every election!
.
- Being a socialist country
(well almost) the tax burden is incredibly high. 42% on income
over US$44,000 and 47% on income over US$65,000. The first thing
I did when I opened a branch in Sydney was convert my degree
to become an Australian Chartered Accountant. As with all tax
codes one MUST be aware of the finer points. For example, there
is NO capital gains tax in Australia on Non-residents that buy
or sell less than 10% of a Corporations Capital Stock.
.
- Financial services in particular
are extremely regulated. Legally speaking one cannot even recommend
a stock to a friend without being a registered advisor. The result
is that financial services are dominated by the BIG Banks and
Institutions (not much different to anywhere else actually).
.
- Here's an interesting point
- there is a law that each employer must place the equivalent
of 9% of an employees payroll into a superannuation fund (pension).
This has generated a massive flow of funds, mostly into the stock
market, over the last 10 years. People believe this flow will
support the market forever - yeah right, tell me another one!
.
- Australia was first out the
gate with the Housing Boom. Sydney property prices are still
astronomical even though they've been off the boil for 2 years.
The result is a demographic that looks eerily similar to the
US in that people are up to their eyeballs in debt. The difference
though is that Australians have a much higher debt to income
ratio than the US. A TICKING TIME BOMB IF YOU ASK ME!
Ok, Greg, very interesting!
But tell us what we DON'T know about Commodities in Australia...
With the institutions dominating
the market, it's really the Big Blue Chips like BHP Billiton
and Rio Tinto which have ALL the following. The reason being
that small explorers just don't have the market capitalisation
to interest the Banks.
So who's trading Juniors?
The small exploration companies,
of which there are too many to count, are almost the exclusive
preserve of:-
- Individual Australian investors
.
- Sophisticated foreigners (normally
represented by London based brokers) and
.
- Canadian Mining Companies.
Due to a smaller pool of investors
in Australia, valuations tend to be lower than the US or Canada.
Canadian Mining Companies are
having a field day here. Swapping their high priced paper for
lower priced Aussie stock and getting UNBELIEVABLE resource reserves
in the process.
Of primary importance to US
investors is the return on Australian assets in US Dollars.
Chart 1 shows how the Australian ETF handsomely outperformed
the Dow Jones since 2002 - I am on record as predicting a major
short term correction however. The Australian ETF is heavily
weighted towards commodity stocks. The returns are even more
pronounced when looking at Aussie Juniors (not shown).
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Chart 1 - Australian ETF vs Dow Jones
Here's another important chart
to watch, the Aussie $:
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Chart 2 - Aussie $ hitting significant resistance
The Aussie $ has been in a
consolidation pattern since Jan '04 and firmly in a downtrend
since January '05. There is good evidence to support the Aussie
may be forming a bottom as it encounters heavy support at the
bottom trendline (green line), the 50 Month moving average (blue
line) and the prior bottom at 70c (red line).
The Aussie $ yields in the
region of 5% and is shaping up for an excellent place to park
some Cash.
The overall Message is Americans
should NOT BE AFRAID of Investing directly in Australia. This
can be done through any big online Australian broker - try CommSec or
Paterson Securities
(I don't have any financial relationship with these companies).
To fund your account you will
have to Wire money to Australia - your bank should be able to
facilitate.
I know many Americans are unaccustomed
to dealing outside the US which is why I am working hard on listing
a Closed End Investment Fund in the US that invests in Aussie
Juniors (Uranium, Gold, Silver etc.).
The Aussie Junior Resource
Market is WIDE OPEN for a player of medium size to become the
Heavy Hitter. It won't be long before this opportunity is arbitraged
away.
For more information on Investing
in Australia or on my proposed Closed End Investment Fund please
feel free to contact me.
More commentary and stock
picks follow for subscribers...
Greg Silberman CA(SA), CFA
(Retired)
email: 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.
321gold Inc
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