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Invest in the Real Wealth
By Neil Charnock

I have decided to make a stronger stand on some things that have been bothering me and also some of my associates – after all I do not want to let down the public investors or companies that I have decided to support. I hope the Government is handed this essay and that the mining industry can take some motivation from what I have to say.

In the midst of the worst economic crisis for decades we are seeing many of the actual perpetrators getting a bailout because they are either too big to fail or because their failure would cause too much disruption to the whole financial system. The thing we are missing here is support for the real wealth generation machine we call the precious metals segment of the mining industry. This sub-sector has the capacity to generate wealth and I wish to outline this genuine opportunity and cast some additional light on this important issue.

Damn it this Country was founded and shaped by gold rushes and gold mining and I believe the sector deserves a break. I would like to thud the table at this point but you would not hear it! Am I justified in this view? Let’s take a logical look as I attempt to clarify some key points.

A significant proportion of Australia’s GDP is earned by our Mining Industry and we happen to be one of the world’s top 5 gold producers. Mining's contribution to GDP was approximately 4-5% during the period 1999-2000 to 2003-04. The real figure is sure to be significantly larger than this however because of the flow on effect from wages and non specific services to the mining industry not included in this figure.

In Western Australia, the contribution of the mining industry increased from 17% in 1993-94 to 23% in 2000-01, before falling each year to 18% in 2003-04 indicating that the industry is vital to that States economy. Imagine how much mining contributed to job growth and the surpluses we enjoyed over the past few years at the Federal level. Think of the growth in Perth and country areas that have boomed and all the associated jobs created and also consider the high wages that generated real disposable income for its workforce which was spent throughout the general economy.

Metallic minerals account for approximately 40% of our mining industry therefore gold mining and polymetallic ores that contain gold are also highly significant. Then we may consider exports – no small issue. Our current account deficit could use all the help it can get. Agriculture is in trouble here due to the lingering drought which is not under our control but the mining sector can be helped in a manner that will increase our national income. In other words the Government cannot make it rain to assist agricultural export revenue however it could assist mining in a proactive capacity.

We only need to support the industry; assist the industry to build itself and it will grow. Global gold production was set to drop, even with the stronger USD gold prices we saw earlier in the year. Now many gold miners around the globe are either cutting back on proposed projects or closing down uneconomic mines. The African trend of declining production over the past few years is spreading.

Australia has a clear opportunity to seize the day here and is supported by a current AUD gold price of over $1100. With insightful placement of the right incentives and tax breaks, plus a significant grant program we could become the world number two producer and chase China in production terms as it leaps ahead of the rest of the world.

You have to ask yourself what Government support the industry is getting already. Tax concessions and assistance? I don’t think so and yet gold is, comparatively speaking, the one stable asset class amongst the current turmoil. As a businessman I understand that 80% of my profit will come from 20% of my activity and 20% of the profit will come from the rest.

I also understand that logic dictates that one should concentrate and nurture the 20% that produces the bulk of the income. Would a sane Government actually reward the terminals that produce good statistics within its jurisdiction or punish them? This brings us to another question.

Should the Government introduce a wealth tax as I have heard bandied about? Well that would be plainly ridiculous in the extreme – cull the best 20% of your business and we may start to look like Zimbabwe for goodness sake. This course of action could send us back to the banana republic days. But on the other hand should the Government let a privileged sector of the economy make windfall profits? Is it not the duty of the Government to make sure they reap as much of the action from the companies that dig up our dirt? Are we better off giving the industry free reign so that it’s full potential can be reached? Which approach would deliver greater benefits to Australia?

To consider this in context we have to remember the mining industry had struggled from the early eighties to 2004 and was only just recovering over the past few years. Exploration expenditure had a small run up in the mid nineties however this was followed by a rapid decline until 2002. Then world exploration turned up while, due to a rising Australian dollar and lack of Government support, our share of this growth promoting expenditure fell behind in real terms. The ABS noted we were spending record amounts on exploration however this was not inflation adjusted and the last exploration boom was over two decades ago.

Please note I refer to growth promoting expenditure here which is completely different to disaster control spending (bail outs) because it is actually investment in capacity to produce minerals and export revenue. This wealth could then be invested into some of the very economic growth and national infrastructure so badly needed. The mining companies would reinvest – and eventually pay out dividends which would flow around the economy and support jobs at a time this is sorely needed.

The juniors have a track record of finding the green field resources so why would the Government not bail out companies like Macmin who need money right now? It makes perfect sense to protect and nurture this segment of our mining industry so that there is a healthy pipeline of discoveries to be joint ventured or taken over by the larger companies down the track. How about the thought that these companies be helped to succeed on their own – such a stupid idea or not?

Some of the smaller miners are in trouble – those of them on marginal operations that is – all because costs have leapt ahead as fast as commodity prices in some cases. Now we have the added problem that base metal prices have temporarily (?) crashed. Otherwise viable companies brought down by inflation caused by excessive monetary growth (real inflation) and global demand which produced a myriad of cost push inflationary pressures.

Ironically these companies are exploiting the lower value resources the larger companies are not interested in and would not bother with. Therefore it would all be bonus income for Australia and a bonus offset for our trade imbalance. What happens if they succeed? Is it so bad if they produce real wealth and jobs and export their hard won minerals to the international market to the benefit of our economy – of course not!

Come on Federal Government and State Governments – nice to see rationalization of the WA Department of Industry and Resources – but we need to see much more. The benefit is for all as I have outlined and the concept of support as opposed to neglect is sane. We need innovation and vision to match the huge hearts of this very tough industry because it is in the National interest.

I am going through quarterly reports lately and there is private local and international support for miners in general and this is coming from the savvy end of the investing spectrum. Many have raised capital in this market which may indicate this thesis may be right. I have reduced my coverage down to a shorter list of preferred gold companies in my members’ area and gold members are now receiving an even shorter list of my preferred gold miners. This narrows the choice down for those that are interested and we are adding new layers to research all the time.

The Australian mining sector is spattered all over the share price floor and the bargains are stupendous if you can work out which stocks are going to survive. Cash, cash flow and profitability are key – so watch the cash costs. The “disconnect” between the AUD gold price and the price of these stocks plus the low level of the Australian Dollar provides an investment climate of a life time. This is a global perspective. If we could enlist Government support to the degree this sector deserves at this point in time we could springboard the sector to maximum National benefit.

www.goldoz.com.au
 



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