dryblower on the mining boom strengthening

Two new forces propel investors into the $1 billion club

Monday, January 14, 2008

WHETHER gold becomes the world's "new" reserve currency, and is driven to even higher prices, is a debating point which fascinates Dryblower. But there's something even more interesting about the return of gold, something much closer to the hip-pocket nerve of investors.

Gold, after a decade (or two) in the wilderness, is doing what copper and zinc did at the start of the mining boom – creating a new crop of mid-tier mining leaders.

Almost without anyone noticing Australia suddenly has a family of companies knocking on the door of the club that only admits members valued at $1 billion and more on the stock market.

Centamin Egypt joined the exclusive $1 billion club late last year, rubbing shoulders with the other gold leaders, Newcrest, Lihir and Sino Gold.

At the last count, Centamin was valued at $1.34 billion, a remarkable achievement for a company which has stuck manfully to the sometimes thankless task of making sense out of Egyptian geology and Egyptian government – with both moving at about the same pace.

Newcrest, a takeover plum which someone should have picked a few years ago, is now screaming ahead at $17 billion, Lihir is sitting on $7 billion, and Sino is in the Centamin league at $1.7 billion.

But, after those leaders the game gets much more interesting for two reasons.

Firstly, because of the way gold stocks are reclaiming their position as genuine Australian mid-tier mining leaders, some with the potential to go further and become world leaders.

Second, because some of the emerging gold sector leaders are companies which critics had written off in prior years as hopeless cases.

St Barbara is a classic example of what perseverance, focused management, large dollops of capital, and a rising gold price can do. Once a business in serious trouble, St Barbara is now capitalised at around $880 million.

Equigold isn't far behind at $853 million. Resolute has cleared the halfway mark with a current value of $563 million, as has Avoca at $503 million.

Fascinating as these numbers are, the real message lies in the fact that gold is adding a fresh dimension (and greater depth) to the mining boom – and ensuring it lasts a lot longer than most economists would have us believe.

Dryblower, at the risk of getting little excited at the start of a year when everyone else is talking about corrections, declines and gloom, sees gold as part of a fresh wave of interest in mining.

The price, at close to $US900 an ounce, obviously dominates everything to do with gold today, and given the debate about central banks (and rich investors) returning to gold as a safe haven for their spare cash, the prices seems destined to stay high, or go higher.

For Australian miners this is a major incentive to go looking for more gold, perpetuating the "hard rock" phase of the boom.

But, there's a second force propelling the boom to a new level, and that's the energy minerals of uranium and coal which are riding on the coat-tails of a rampant oil price.

Uranium, after two years of speculation, is also entering a new era of genuine demand – for which there is an obvious shortfall in supply.

Britain's decision to encourage a new generation of nuclear power reactors is a big step towards the world going nuclear. Other European countries, especially those too dependent on Russian gas supplies, will follow the British lead and re-embrace the nuclear option.

What this all means for investors who once lamented the loss of Australia's mid-tier mining sector is that uranium is highly likely to soon do the same as gold – throw up a series of candidates for the $1 billion club who will be entitled to join ERA and Paladin.

For Australian mining the critical factor is not who's on top, or what commodity is hot today.

The importance of gold reviving, and uranium finding a fresh market in Britain, is that the mining boom is showing signs of deepening and becoming a permanent fixture as the world scrambles for resources of every type.