Critical Metal Developers: The Iron Ore Story from 2003 |
Thursday, 15 February 2024 | By James Cooper | Editor, Mining: Phase One and Diggers and Drillers |
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[6 min read] In this issue: 20 years ago, it was iron ore…is history about to repeat? Rising prices will drive development in critical metals All across Europe the natives are getting restless... |
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Dear Reader, Here’s something I thought you’d find interesting, an article published in The Age way back in July 2003. The headline reads: ‘[Andrew] Forrest has a grand $1.2bn plan for tiny Perth mining company’. The company was called Allied Mining and Processing. There’s a fair chance you’ve never heard of that company. But from small roots this tiny outfit grew into one of Australia’s largest listed companies with a market cap exceeding $88 billion. 20 years ago, Forrest renamed this micro-cap stock to Fortescue Metals Group. The rest is history. But it was quite the story behind Twiggy’s road to immense wealth. We now know Fortescue was perhaps the single biggest success story from the last mining boom. A stock that grew from a measly $0.02 back in 2003 to more than $10 a share just five years later. It seems absurd but that’s around a 50,000% return! Junior iron ore miners were the poster child from the early-2000s China led commodity rush. But it wasn’t a smooth road to success. You see, back in 2003, Forrest was looking to break into the monopolised iron ore market, a sector dominated by mining giants Rio Tinto and BHP. At the time, he’s ambitious venture was mocked by analysts and journalists. Accessing cash to build a capital-intensive iron ore operation was as good as impossible in the early 2000s. Sure, iron ore mining is cheap and relatively easy to extract. Simply load rock on a boat and ship it to China’s massive steel refineries. But few consider the vast infrastructure required to get to that point. Iron ore is a bulky commodity. Mine feasibilities must include costs that extend well beyond the mining operation…railways, ports, loading facilities. It’s this barrier to entry that’s enabled the majors to retain their grip over iron ore supply. Yet these challenges didn’t deter Forrest. Similar to today’s evolving energy transition story, China was emerging as a powerful source of demand for iron ore. In 2003, the country’s GDP was surging at around 9% per annum. But few predicted this precipitous growth would continue. Fewer still could have comprehended the incredible trajectory of iron ore prices over the next five years. In 2003, the global economy was reeling from a tech bust and terrorist attacks…iron ore stank sitting BELOW US$20 per tonne. Fast forward 20 years and note the similarities 2023 was a terrible year for most commodities especially those tied to the renewable energy trend. That’s despite investment in renewable energies hitting an all-time high in 2023 at US$1.77 trillion. According to BloombergNEF that was up 17% from 2022. Yet, junior mining stocks have endured back-to-back years of underperformance. But while the mainstream narrative turns bearish on critical metal stocks, the world’s most liquid insiders continue to build exposure. That includes mining tycoons, Andrew Forest, Gina Reinhart, Robert Friedland. These heavyweights are still long on the critical metal mega-theme. Have no doubt, the spoils will go to those who are able to stick with these gargantuan commodity trends. 20 years ago, that was iron ore. A commodity that was slow to respond to China’s rampant growth, but once it did, growth was historical! By 2005 iron ore prices had almost tripled reaching US$50 per tonne. Three years later and iron ore was hovering just below US$200 per tonne. Almost a 10-fold surge in just five years! Liquidity challenges stalling mine development Ultimately, higher iron ore prices turned Andrew Forrest’ iron ore ambitions into reality, that’s despite inconceivable development costs. Which brings us back to today’s market… In a case of history rhyming, critical metal developers sit at the edge of enormous opportunity. Its why I like to say critical metal stocks are the iron ore developers from 2003. Sitting at the precipice of a major upward leg in the commodity cycle yet hobbled by enormous cost of capital required to get projects underway. Just like it did with iron ore in the early 2000s, expect downbeat sentiment to shift rapidly in line with rising prices. This is how commodity cycles work. This is how capex finds its way into new projects. But don’t take my word for it… Watch the world’s biggest insiders and follow their lead. Regards, James Cooper, Editor, Mining: Phase One and Diggers and Drillers James Cooper has been a working geologist in mines across Australia, Canada, and Africa since the early 2000s. He’s led the operations of tiny explorers through to huge producer outfits. He’s seen booms and busts firsthand and he also understands the cyclical nature of individual commodities. For example, James was right there when Barrick Gold launched an enormous $7.5 billion takeover bid for Equinox. That was the peak of the last cycle. With his background as a geo and finance professional, he brings a unique insight and experience to Fat Tail Investment Research. He writes the broader resource-focused investing letter Diggers and Drillers and the ultra-speculative explorer-focused trading service Mining: Phase One. Advertisement: THE FATAL FLAW IN ‘FULL ELECTRIFICATION’ Australia and 139 global governments are now marching in lockstep. We’re moving towards Full Electrification. But there’s one fatal flaw everyone is conveniently ignoring. And Aussie investors who spot it first could stand to benefit. CLICK HERE FOR THE FULL STORY |
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| By Bill Bonner | Editor, Fat Tail Daily |
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[3 min read] The natives are getting restless. Driving through France, you see road signs turned upside down. We didn’t know what to make of it. “That’s the farmers,” a friend informed us. “They’re turning the signs upside down because they say the whole system of farm regulations is upside down.” Bloomberg: ‘Farmers’ Revolt Threatens Election Year Upsets Around the World ‘Eric Foucault is driving his hulking green tractor more slowly than he can walk. Shouting into his mobile phone above the cacophony of engines and horns, the farmer from south of Paris is one of 200 others clogging up the highway into the French capital. ‘Foucault and his fellow protesters are restless, their list of grievances long: soaring costs, increasing bureaucracy, new European Union regulations in its Green Deal and imports diluting their markets. “He who sows misery reaps anger,” says one of their placards.’ France isn’t the only country where the feds are planting misery. The Guardian: ‘Thousands of tractors block Berlin… ‘An estimated 30,000 protesters, including farmers supported by a wide range of representatives from other industries from fishing to gastronomy to logistics, blocked the streets around the government quarter on Monday with their vehicles, including lorries and forklift trucks, and even children’s toy tractors.’ The Cost of Government As we saw yesterday, ‘inflation’ takes several forms. There’s monetary inflation, fiscal inflation, and regulatory inflation. Choose your poison. Either way, the ‘inflation’ is a cost of government; prices are higher than they would be otherwise because of some government policy. The more policies, the higher the prices. Joseph Tainter proposes that the rise and fall of civilisations traces an arc of inflation. Inevitably, a society faces challenges. Its elites find solutions…which inevitably lead to more wealth and power for the elite themselves. Each ‘solution’ imposes some form of cost, aka inflation — via taxes, regulations, controls, government spending or money-printing. Finally, the costs become so great that the society sinks into ‘the swamp’. This implies that the cost of government is actually a lot higher than you think — and eventually, fatal. And you can’t measure it only by adding up consumer prices and taxes. Look at countries that have had large, ambitious governments — the Soviet Union, North Korea, or Hitlerian Germany. (In 1945, nearly half of Germany’s entire GDP was devoted to its military and firepower industries.) People in these countries do not necessarily suffer from rising consumer prices; prices are typically controlled, along with everything else. But they always suffer. And usually from a form of state-imposed shrinkflation, where the availability and quality of goods and services shrinks…until there is little left. And then, it is just a matter of time (perhaps a long time) before the system fails completely. Pretending to Pay In the Soviet Union people used to say ‘we pretend to work and they pretend to pay us.’ The ‘work’ — directed as it was by the deciders — was largely useless. Taxi drivers, for example, were paid on the basis of how many miles they drove each day. They soon developed a scam…jacking up the rear of the taxi, they idled the motor as the wheels turned and the odometer spun around. Then, they took the ration of gas that they hadn’t used, by not picking up passengers and not taking them where they wanted to go, and sold it on the black market. But when they got paid, they discovered that other parts of the economy had been similarly corrupted; there was nothing much to buy. To reduce this to a memorable axiom: the larger the government, the poorer the people. And it’s not just the farmers who are up in arms. Here’s the latest from France. The Western Journal: ‘Nationalist and populist movements are making great strides across Europe — even in France, where the once-thought-powerless right-wing National Rally party is surging in the polls. ‘While the next presidential election in France is still three years away, a new poll shows National Rally’s Marine Le Pen is leading and could win the 2027 race.’ In Pakistan, voters just sent the political establishment a warning: ‘“It is now evident that there is much anger against the establishment’s open and constant interference in civilian matters — interference which has only grown over the years because there has been no firm political consensus against it,” Pakistan’s Dawn newspaper wrote in a post-election editorial.’ In Argentina, Mr. Milei, the most audacious of the reformers, tries to undo 70 years of policy mistakes. The OCRegister: ‘As Milei proved in Argentina, far-left status quos can’t last forever and can be defeated’. Straw Poll In America, voters face a grim choice — between a geriatric hack…and a political grifter; what can they do? Dan Denning reports: ‘Watched the Super Bowl last night with family and friends...the ads are always a big deal. The three ads everyone remembered: ‘1. A State Farm ad with Arnold Schwarzenegger ‘2. An ad about Jesus ...showing people who are traditionally enemies/adversaries washing one another’s feet ‘3. And RFK, Jr. for President as an Independent using the theme song and images from JFK’s campaign (evocative of all the Camelot nostalgia) ‘Quick straw poll of a traditionally conservative family had three members saying they’d vote for RFK, Jr. over either Trump or Biden.’ What’s next? Will someone really ‘drain the swamp?’ Or, will we drown in it? Regards, Bill Bonner, For Fat Tail Daily All advice is general advice and has not taken into account your personal circumstances. Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment. |
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