Frank there was also this reference here about why Ore is on the rise
Its not really an article that mentions Fmg. But buried in it is a reference to scrap which the government is reducing
Trump and our miners
Robert Gottliebsen
Trump and our miners
This week I had the pleasure of lunch with Sandeep Biswas at the Melbourne Mining Club. Sandeep is the chief executive of Newcrest Mining and as I listened to him, I began to realise we are developing a multi-strata resources industry in the wake of the terrible times the industry has been through in recent years.
But before we discuss these strategic alternatives, which clearly affect BHP Billiton and Rio Tinto, I want to talk again about Donald Trump.
This has been the week of Trump disenchantment, when markets began to question whether the refugee gymnastics indicate that he will be unable to pull off his dramatic US revolution.
The surface manifestation of those doubts came in the bond markets, and we saw bond yields start to fall early in the week. But then across my desk came a fascinating extract from a new research paper from several economists, including Thomas Piketty, that reveals that the bottom 50 per cent's share of income in the United States is "collapsing".
In the US, between 1978 and 2015, the income share of the bottom 50 per cent fell from 20 per cent to 12 per cent. Total real income for that group actually fell 1 per cent during the period.
That’s not the case elsewhere. In China – where there also has been a marked rise in income inequality – the bottom 50 per cent saw their income go up by 401 per cent; not surprising given the industrialisation of the world’s second-largest economy. Even in developed France the bottom 50 per cent saw their income grow by 39 per cent.
President Trump was elected on a promise to help what he said were "forgotten Americans". And they love what he is doing.
Nevertheless we are going to see a lot more market fluctuations because of the totally unconventional way Trump is approaching the presidency. We could never imagine a US president reading the law in public to influence judges. Who would have imagined a company taking its business away from the president’s daughter being given a presidential blast that sent its share price down.
We are going to have a lot more of these adventures.
But for the share market a key issue is whether Trump will actually be able to reduce the US tax rate substantially, and whether that will convert to a dramatic rise in American industrialisation and a flood of money into the US.
I believe he will pull this off, but I must emphasise that those that have a different point of view have validity. The jury is out. (Although, the market is coming around to my view, and late in the week bond yields firmed and shares rose.)
Three majors, three pathways
What happens in the US has a big longer-term impact on commodity demand in our resources industry, which brings me to the strategy of Biswas at Newcrest. First and foremost Newcrest is a play on the gold price. But there is more to the company than that.
Sandeep’s background is technology and innovation, and he cut his teeth on improving the productivity at Mount Isa and Western Mining. And later he was recruited by Rio Tinto to run the alumina business.
He believes that increasingly mining companies are going to need to extract from more difficult ore bodies, often deeper. This culture of technology innovation is what has enabled Newcrest to make sense of the Lihir gold/copper deposits in New Guinea. And it has transformed the Cadia deposits in NSW. A similar approach will be required in the enormous Wafi-Golpu deposits in Papua New Guinea where Newcrest has used its exploration skills to uncover a massive new gold-copper deposit under the original reserves. But there is still a lot of work to be done.
Basically, the Biswas strategy is to duplicate the old Western Mining strategy, which involved looking for ore deposits and finding ways to develop them. But he is using modern technology in a way not possible in the old WMC days. At the lunch he called on the industry to be more collaborative in developing new technologies. He ruled out major acquisitions by Newcrest, preferring instead to improve the productivity of exiting deposits and exploration. Of course, Newcrest would not rule out buying into small explorers who made a major find and needed a partner. This is old fashioned mining.
Fascinatingly, BHP has a different strategy. Yes, BHP is looking to use all the modern technologies to improve the productivity of its mines. But it is not an enthusiastic explorer for new deposits around the world. BHP (along with Rio) has just had a fantastic half-year, but it will be even better this year if the current prices hold. BHP is clearly going to distribute a lot of its spare cash to its shareholders.
But BHP’s chairman, Jac Nasser, and chief executive Andrew Mackenzie were called up by Trump prior to his inauguration. Trump wants BHP to invest heavily in its US oil and gas reserves because he wants to develop energy in the US to support his infrastructure and industrial expansion plans. And the first installment has been this week's $2.9 billion commitment to develop the Mad Dog 2 field in the Gulf of Mexico. Of course, in the process it might send the price of oil and gas down.
And Trump offered the Big Australian the carrot of much lower tax rates in the US to entice BHP. We do not know just how much money BHP is going to commit to US development but my guess is that it will substantial. BHP is a long-term bull on oil prices. Meanwhile, the fact that China is reducing its electric arc furnace capacity (which uses scrap as a raw material) means that more iron ore will be needed to support steel production.
Understandably Rio was not wooed by President Trump and the clear message from Rio is that it’s going to be in the business of rewarding its shareholders. The market was a bit disappointed at the latest cash distribution but it's clearly going to get bigger. The group does have some projects which may well be developed in the future but, after a terrible time following the Alcan acquisition, Rio wants to combine its much improved productivity and higher prices with unprecedented rewards to shareholders.
So there you have the three models:
- Newcrest, with its emphasis on new operations and exploration via technology;
- BHP, with mountains of cash and the enticement of US investments, and;
- Rio Tinto, with lots of wonderful surprises for its shareholders. (And remember with Rio that although the returns in 2016 were excellent, they are set to be even better in 2017 if current prices hold
(20min delay)