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Mining’s fiscal cliff arrives early?

Mining’s fiscal cliff arrives early?

As you know we have long warned about this. We warned that China’s growth would slow and that even if it didn’t, its appetite for iron ore would. In print, in the press, here on our blog, and on TV and radio we have warned that mining would see its own ‘fiscal cliff’.

You can listen to one of our very many discussions about this topic with ABC NewsRadio’s Mark Colvin here.

And with Ticky Fullerton on ABC’s The Business TV program a year ago.

Now, the weight of major institutions swinging across to this line of thinking will start to weigh on sentiment too.

The National Australia Bank recently wrote the following in a paper flatteringly entitled, ‘Will mining investment fall off a cliff?’:

“The recent capex and exploration expectations data suggest that mining investment may be approaching a turning point. A decline is inevitable: the question is when and how fast.

“On the basis of past engineering construction commencements, there are reasons to believe that there is a risk of a decline in 2014 big enough to take 2% points off GDP growth in that year unless another ‘mega’ project starts soon. Lower levels of bulk commodity prices are also likely to be positive for the underlying trend in mining project commencements.

“If mining investment retreats spectacularly in 2014, non-mining investment will need to fill the gap quickly if employment growth is to be maintained.

“Many commentators have expressed a relatively sanguine view about the likely course of mining investment over the remainder of 2013. For example, in its most recent statement on MonetaryPolicy, the Reserve Bank wrote that, ‘. . . given the magnitude of resource projects already committed, particularly liquefied natural gas (LNG) projects, mining investment is expected to remain at an elevated level for a couple of years.’ However, current investment levels look unsustainable”.

They were spot on. Not only has a new mega project not been announced to fill the gap, but Woodside have dropped their $43b Browse project.

As an aside, for a month now, our process in The Montgomery [Private] Fund has not been able to identify sound replacements for the investments we have sold (due to them rising well above their intrinsic values)as a result The Fund has been holding 36% cash and has so for more than a month.


Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. James Kennedy

    After two weeks of reflecting on that, and tracking the history of corporate successes in a country like America…I have to say I think you’re very right. It’s very noticeable that a company can reach a scale where the economics of the business are clear enough to understand and invest in – yet still a company may only have expanded within particular geographic regions or market segments (the long rise of Wal-Mart is a classic example), leaving a long path of strong growth still open to savvy investors.

    Thanks for your thoughts!

  2. Interesting comment re the difficulty in identifying sound investments with prices below intrinsic value in the current market – I find myself in complete agreement, certainly as far as the ASX is concerned. Prices now are almost enough to make one yearn for a return to the high volatility of 2011 and 2012…

    The scarcity of quality companies with sustainable competitive advantages in our market is making investment particularly frustrating.

    Value investors must also find it disappointing that our Australian companies have not had the earnings growth of their US counterparts (the ASX has risen progressively, but by more than corporate earnings). My suspicion is that they lack the hyper-competitive drive and thinking necessary to succeed in America – Roger, do you have any thoughts on whether corporate Australia will (or can) recover the initiative?

    • I think the drive is there. The problem is one of size. Australia is so much smaller and maturity of a business comes much sooner. A US business also enjoys much lower labour rates. Finally the Montgomery Funds own many companies that are growing earnings by 20% or more and we believe they will continue to achieve that. As you correctly note, the share prices have run up well in advance of the anticipated growth and so risks exist stemming from a company’s failure to deliver against expectations. But whose fault would that be, the company’s or the investing public’s?

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