China merchant's ASX favourites By Tim Treadgold PORTFOLIO...

China merchant's ASX favourites
By Tim Treadgold



PORTFOLIO POINT: After 40 years trading commodities in Hong Kong, Richard Elman knows what China wants. That’s why he’s buying into Australian resources.


The high-priced, 10-month long bidding war for mid-tier miner Consolidated Minerals probably means that it’s too late for most investors to join that game, which is all about getting a bigger share of the Chinese market for minerals. But there is another, more interesting way to participate in the China trade, and that’s to follow the Australian investment footprint of veteran Hong Kong Entrepreneur Richard Elman.

Until recently, few outsiders knew much about Elman or his Noble Group. He was the classic backroom commodities trader and deal maker, acquiring cargoes of iron ore, coal, oil, soy, sugar, or any number of other materials, and delivering it to customers in Asia. On the way, he peeled off fees as buyer, supplier and shipper – a classic supply chain management role.

Today, 67 year old Elman is changing tack. He is expanding his direct equity stakes in raw material supply companies, largely because his world is changing. High-speed communications between suppliers and consumers means the middle man is in danger of being cut out of deals.

That’s why the Singapore-listed Noble Group, with annual revenue of $US20 billion and pre-tax profit of about $US370 million, can today be found as a major shareholder in a number of Australian mining companies, including:

Gloucester Coal, where Noble has taken a 10% stake, partly to frustrate a takeover bid by the big Swiss-based miner Xstrata. Noble also owns other Australian coal assets, which have the potential of being merged to create a bigger coal business.
Precious Metals Australia, where Noble holds a 4% interest in the company, plus a direct 10% interest in PMA’s primary asset, the Windimurra vanadium mine in WA, plus marketing rights to the vanadium – used to harden steel.
Territory Iron, where Noble controls a company that has a 30.8% stake in the emerging Northern Territory iron ore miner, and holds a life-of-mine marketing agreement on the iron ore from Territory’s Frances Creek mine.
ConsMin, where Noble has a small indirect interest through its Territory Iron position, and holds a life-of-mine marketing agreement on manganese produced at the Woodie Woodie mine in WA.

In each case, Noble has used its trading relationship with Asian customers to acquire an equity position in an Australian miner and, where possible, a marketing agreement on the minerals produced.

Each stock chosen by Noble has performed well despite the August sharemarket correction. Gloucester Coal has risen from $3.21 to recent trades at $4.19; PMA is up from $1.51 to $1.71; Territory Iron is up from 59¢ to 89¢, and ConsMin, has risen from $1.66 to about $4.32, driven steadily up by a series of complex, competing, takeover bids.

Elman does not confine his interests to Australian resources. He controls 10% of the soy exported from South America, and is a major soy “crusher” in China, neatly controlling the supply and distribution of product. He is also an emerging player in the ethanol business, and ranks as the world’s second-biggest trader in thermal (electricity producing) coal, and the biggest non-miner trader in iron ore.

What makes him interesting to investors with an eye on growing their exposure to China is that his actions have been distilled by 40 years of Asian commodities trading. Nobody better understands what China wants, or how to source the raw materials to meet those needs, or what companies to invest in, to ensure Noble has access to raw materials.

In essence, following the investment strategy of Elman represents a proxy for riding Chinese raw material demand. The ConsMin situation is an example. A decade ago, Noble had a marketing arrangement with the previous owner of the Woodie Woodie mine, Valiant Consolidated. When Valiant failed, Elman teamed up with the man who had the manganese transport contract, Michael Kiernan. While Elman took a back seat (and the manganese marketing contract), Kiernan took the job of running ConsMin – with Elman as the silent partner.

The same structure is emerging at Territory, where Kiernan is developing the Frances Creek iron ore mine (while simultaneously running a battle to reclaim ConsMin).

Standing back from it all, you can see Noble has marketing agreements with both the would-be predator and the prey. He has a marketing agreement with Territory on Frances Creek iron ore – Territory is bidding on ConsMin. He also has a marketing agreement on the Woodie Woodie manganese deposit, the core asset of ConsMin.



In terms of future action, it is possible to see the Elman/Kiernan arrangement blossom into other deals. An obvious starting point is the integration of Territory with PMA, where Kiernan has been appointed chairman. The combination of an iron ore and vanadium producer is a natural fit, as would be a manganese or nickel miner as each mines product used by the same customers – steel mills.

The ultimate objective of Elman and Kiernan, to create in Territory a business supplying steel-making raw materials to China, is exactly the same as the likely winner in the ConsMin brawl, the Pallinghurst group led by one-time BHP Billiton chief executive, Brian Gilbertson.

In fact, it might even be argued that Pallinghurst and the Noble/Territory combination is seeking to mimic, in miniature, the business base of BHP Billiton and Rio Tinto, which are world-class suppliers of steel-making basics such as iron ore, coal, manganese and nickel.

In terms of a strategy, Noble is behaving in a similar way to the Swiss-based Glencore group, the ultimate parent organisation of Xstrata, Noble’s rival in the fight for control of Gloucester Coal. Like Glencore, Noble wants to put its foot on raw materials, and earn fees as a supplier and profits as a producer.

Glencore’s effective control of Minara (formerly Anaconda Nickel), and its direct investment in the Murrin Murrin nickel mine is a mirror image of Noble’s business approach.

Building another Xstrata, the company that acquired Australia’s copper and coal miner, MIM Holdings, Canada’s nickel specialist, Falconbridge, and was under-bidder to BHP Billiton for WMC, is not on Elman’s agenda. He says creating and managing “pipelines” of raw materials is what drives Noble Group, with valuable strategic investments of secondary consideration.

Late last month, Elman gave one of his rare interviews explaining, during a wide-ranging conversation, his role in the ConsMin takeover and relationship with the emerging Territory – all the time speaking as the middle man who has cross-linked marketing and investment links with both companies.

“Territory is the great asset that ConsMin needs,” he said. “It’s an iron ore producer, and we really are ready to ship. “We took this thing over just four months ago. That’s what Michael [Kiernan] is all about. He makes things happen.

“Look at the history of ConsMin. It was bankrupt. Michael was the truck driver and his life savings went out the window. We owned the asset because we had the right documentation. But he put the deal together, and we converted our debt into equity. He took ConsMin from being bankrupt to being worth $1 billion.”

Elman’s view is that what Kiernan did once at ConsMin he is likely to repeat at Territory, which is why Noble has signed a life-of-mine marketing agreement and provided Territory with price of $US75 a tonne for its first shipment of ore scheduled to leave Darwin later this month.

Other key points from Elman included:

His optimism that demand from China for raw materials will not slow. “For my money there’s a good five-to-10 years of solid growth in China.”
No concern that the US credit squeeze will hurt business in Asia. “So far I’ve not seen negative effects. It’s possible there will be some, but I think there’s enough growth in the world to support our business.”
Increasing interest in soft commodities, such as cereals and soy. “People need to eat every day.”
Some disbelief in the long-term use of biofuels. “I’m not convinced that agricultural-product-to-energy is a solution for the whole world. I’m very convinced that it’s a solution in certain countries (such as Brazil).”
Growing interest in obtaining direct ownership of mines and other means of production.
The potential for more aggressive expansion through acquisition. “We believe there’s a lot of consolidation going on in the industries in which we operate.”
Willingness to back start-up operations, such as Territory Resources. “We are probably better at buying greenfield projects than expensive existing projects.”

There are two ways to follow Elman; directly via Noble which is listed in Singapore (SGX code: NOBL), and on which Macquarie Equities has an Outperform recommendation, or through the suite of Australian listed miners in which he has marketing and/or equity involvement – Territory Resources (ASX code: TTY), Gloucester Coal (GCL), Precious Metals Australia (PMA), or Consolidated Minerals (CSM).

On Noble, Macquarie said in its August 29 report that the company was growing beyond trading transactions. “Noble has made the smart decision to take small stakes in key assets, winning marketing rights for its respective produce in return. This should help spur growth in marketing and fee income.”




RAB