Saturday, January 05, 2008

Seeing the Forrest for the twigs

Guambat noticed, but didn't pay much attention, to the hot goss in the Australian press just a few days ago, that the Packer name was being replaced at the top of the list of Australia's richest by one Andrew "Twiggy" Forrest, e.g., this and this.

In an exhaustive review of Australia's commodity boom which mentions Mr. Forrest in passing, Bloomberg has now turned its attention to the story behind the story, in China-Australia Axis Turns on Mining, PM's Mandarin, by William Mellor.

Andrew "Twiggy'' Forrest isn't the most likely candidate to become the poster boy for Australia's mining boom. His last big venture ended in disaster for many investors.

U.S. bondholders who bet US$400 million on an Australian nickel mining company he founded in the 1990s, Anaconda Nickel Ltd., recouped only 26 cents on the dollar. Anglo American Plc, the world's second-biggest mining company, fared even worse. It walked away with just 7 percent of its US$200 million investment in Forrest's company.

Today, Forrest, 46, has once again charmed investors, in Australia and beyond, this time with the promise that he'll become one of the largest suppliers of iron ore to China.

Australia may be riding a commodities super cycle in which prices will rise for decades, says Alan Heap, Sydney-based director of commodities analysis at Citigroup Inc.

Australia is the world's No. 1 exporter of iron ore, coal and alumina, which is derived from bauxite. It ranks second in zinc and lead; third in gold, nickel and manganese; fourth in copper; and fifth in liquefied natural gas (LNG), according to the Australian Bureau of Agricultural and Resource Economics, a government agency. It also has the world's biggest known uranium reserves and is the No. 1 producer of diamonds by volume. Coal is Australia's most valuable export, bringing in A$23 billion in the financial year ended on June 30.

Previous predictions of a super cycle haven't always proven correct.

So far, Fortescue hasn't produced a single ounce of iron ore.
Australians know themselves to savage the "tall poppy". The criticism of cutting down the tall poppy is whether the act is deserved or petty jealousy, and Guambat has noticed over the last decade that Australians are becoming more inclined to give even tall poppies a fair go.

But Twiggy may just be another thing altogether. Like Alan Bond, when a person has form about visiting financial harm on others, that particular poppy is just waiting to be pruned.
Nervous about backing Mr Forrest based on the experience of his previous venture, the problem-riddled Anaconda Nickel, most analysts have shunned Fortescue.

As a result, Australia’s best-known and biggest fund managers have largely missed out on Fortescue’s phenomenal performance over the past three years, leaving billions of dollars of potential profits on the table while more supportive overseas investors have enjoyed a once-in-a-generation bonanza.

Australia’s blue-chip broking houses such as Macquarie Equities, ... expect Fortescue to slump to just $3.36, and Goldman Sachs JBWere, which predicts they will fall to $6.02 next year. (Brokers pay for not trusting $8b man)
It may just be that, after the gorging on the stuff that comes up out of the Australian terra firma, Australians are beginning to get their fill. Or it may just be that there is still plenty room for mints.

One more can't hurt, surely?
Has the Australian economy reached bursting point? Or can it cope with one more wafer-thin mint? "I'm likening it to Mr Creosote, the Monty Python character who just keeps eating," says Hans Kunnen, the head of investment research at Colonial First State.

It's quite a comparison. Mr Creosote, the morbidly obese diner from The Meaning Of Life, gorges himself on the entire menu in a fancy French restaurant, unable to restrain himself from one helping after another. Sure, he knows he has had enough but, as the satire of excess shows, being unable to keep his food down between mouthfuls is no obstacle to downing more.

And just as Mr Creosote doesn't know when to stop, investors are now asking, does Australia?

Consider the similarities: 15 years of uninterrupted economic growth, investors dining out on cheap credit, a debt-fuelled investment binge, ever-expanding profits from rising resource prices, full employment, wage growth and rising house prices.

One more serve couldn't hurt, surely?

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