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Summer in Perth, Winter in London

- By: John P Sykes
Posted in: Blog, Exploration, Mining, Travel


Having cleverly avoided the frigid London winter (only just – the aeroplane had to be de-iced on the runway before take-off) by spending January in Perth, Australia, it’s only fair to share some thoughts on this mining hot spot. In particular, its contrast with London, which seems to be in the grip of a harsh physical and financial winter.

Summer in Perth

Over the last year, the Australian Stock Exchange (ASX) metals and mining index has risen by about 65%, with some of the speculative junior stocks making increases of more than 1000%. Australia has benefited from the vast stimulus in China and the consequent flow of money looking for commodity investments to secure raw materials for China’s Industrial Revolution. Australia is the nearest stable mining location to China (Indonesia and Papua New Guinea in between are hardly risk free). The ASX has also benefitted from the ‘hot money’ (low interest-rate borrowings and stimulus money) from the US looking to be involved in a relatively popular carry trade between US and Australian assets.

It may just have been the effect of the searing summer sun, but there seemed to be an optimistic, if slightly decadent mood, on the streets of West Perth.

Winter in London

By contrast, London’s AIM index, which is supposed to facilitate speculative, start-up type companies, such as junior miners and explorers, has not seen a mining IPO since the middle of 2008. The market has been frozen. Research by Ernst and Young shows the effect of the 2008 downtown on the junior miners listed on AIM – it wasn’t pleasant. For those that survived and weren’t completely wiped out, many saw falls in the share price of 90% plus. If your £1 share fell 90% to 10p, even a subsequent 500% increase, only brings your share back to 60p!

Flying back to Britain, the pilot announced before landing in London that it was “five degrees centigrade and raining” – a pretty apt description of how wandering around the City of London currently feels.

But winter follows summer…

The issue of mining IPOs is of particular interest as they are a good indicator of a buoyant market, and whilst there have been none on the AIM index for around 18 months, there is currently a tidal wave being held back by broking bureaucracy in Australia. columnist Dryblower described this potential flood in his 7th December column. According to announced plans at the time, there were no fewer than fifteen floats planned in the seventeen trading days left that year, including the huge Q Copper float. This sounds like a buoyant market, but Dryblower titled his column “a sinking feeling as all the floats flood in”.

Dryblower was concerned about fatigue setting in amongst the ASX investors, as so many companies try to list in such a short period of time, when after such a successful and eventful year, perhaps Christmas would be a time for investors to sit back, drink some sherry and enjoy the fruits of their labours, especially when bearing in mind what many are forecasting for 2010.

To those of us based in Britain this queue of IPOs seems to be somewhat reminiscent of the queues of people outside failing bank Northern Rock, knowing that the first in got their money and those at the end of the line got nothing. Could this be a sign that those in the industry think the equity cash may be about to dry-up and they had better be at the front of the queue. Is this a “run on the stock exchange”?

Most forecasts for 2010 seem to be either of the super-bullish worldwide recovery or super-bearish 1930s America style depression variety. Either way, 2010 does not look like a quiet year, and maybe it is time to recuperate and ready oneself for the upcoming efforts.

Whilst we have not seen as many years in the mining sector as Dryblower, we’ve seen enough to know that in finance, just as in physics, what goes up often comes down and what goes down usually comes back up (eggs off tall buildings and Lehman Brothers shares being the exceptions respectively). Market sentiment changes and nobody is entirely sure what is awaiting Perth this winter. If either of the extreme scenarios plays out in 2010, they might not be good news for Australia. Economic recovery will see a rise in interest rates and a withdrawal of cheap stimulus money, whilst a double dip recession will weigh heavily on commodity prices.

The ASX has been heating up for a few years with various booms seen in major metals such as nickel, iron ore and copper equities, along with what seems like a permanent gold equities boom. However, there have been an increasing number of more speculative, minor metal booms as well – first uranium, then lithium and now rare earth metals. One has to wonder if Australian investors are running out of corners of the Periodic Table to spruik?

…just as the sun follows the rain?

Although London’s AIM market looks rather cooler at present, many are forecasting a hot summer. London, which, unlike Perth or Vancouver, has no mining on its doorstep, may just be taking a little longer to catch the mining bug currently going around, especially when many AIM miners have assets in Africa, which still may be seen as a little risky for the moment. Perhaps AIM’s time in the sun will come this summer.