Aussie’s love penny stocks and Australia is one of my favorite “go to” markets for investors who want to “globalize” their portfolio. It’s a safe and stable economy with a lot of potential. But better yet, it is largely removed from the debt worries plaguing the U.S. and European markets. But with problems this big, it’s hard not to get sucked into the turmoil.
In November, Australia cut its interest rates. That might not sound like big news. Major economies around the world have been slashing rates for the past four years. But this is different. Australia was the first developed economy to raise its interest rates after the global financial crisis in 2008 and 2009. And it continued to raise rates through November 2010, when it made its last move, bumping rates from 4.5% to 4.75%.
For a numbers geek like me, this is my bread and butter, especially since it deals with big-picture, global impact data. This is the kind of stuff — the undercurrent — that helps me see the big trends in the international market. But you’re probably wondering why you should care. I have two words for you: Resource and Opportunity.
What this rate cut means for investors is this: more exports for Australian companies and more profits for their bottom line. The resource sector is strong in Australia. In fact, Australia is going through a mining boom. In late October, BIS Shrapnel said in its report “Mining in Australia 2011 to 2026” that investment in Australian mining could reach $85.7 billion by 2015 or 2016. This year the estimated investment figures top out at only $48.5 billion, meaning the industry could see growth of nearly 20% a year for the next four years.
But some analysts think much of that growth will happen next year. And this cut in interest rate will be sure to fuel a lot more projects. When interest rates are cut, the value of the underlying currency drops. After the announcement on November 1, the Australian dollar fell 0.4% overnight. That might not sound like much, but when you’re talking about millions of dollars’ worth of exports, this difference can add up quickly.
For example, if a buyer wanted to buy $1 million in iron ore, he would pay $4,000 less after rates were cut. No wonder 80% of the investment capital in Australia’s resource projects comes from outside the country. Everyone wants a piece of this pie. Australia isn’t the only fish in the pond, though… Indonesia, Turkey, Brazil and a host of other export countries are all trying to bolster exports. Australia’s rate cuts could be justified by needing to stay competitive in the resources sector. The growth expectations and stable government and economy make Australia very attractive.
And the best opportunities may just be in the smaller companies; those where $4,000 makes a big difference. The junior mining sector will be a big place for investors over the next three or four years. That $85.7 billion isn’t just going to go to the big guys. JUMEX, or junior mining and exploration companies, can move quickly. Take a look at this chart over the past two years.
This is Independence Group (IGO:ASX). It is a nickel producer with the Long Nickel Mine in Kambalda, Western Australia. It also owns stakes in six joint ventures across Australia. Plus, it is exploring in five 100%-owned mines. The company’s looking for gold and base metals… and prospects are good. I like IGO because it’s actually producing something, so it has a cash flow. In fact, the company’s nickel production exceeded expectations for the third quarter (ending Sept. 30). IGO also has made some strategic acquisitions that have bought it stakes in other joint ventures.
These points are key for any investor looking to take a position in a junior mining company. A producing company is almost always safer (from an investment standpoint) than a small exploration company. Reserve estimates for its exploration projects keep growing, too. Its Tropicana joint venture just boosted gold reserves from 5.56 million ounces to 6.61 million ounces. IGO’s stake is for 1.98 million ounces of those deposits. At current market value, that’s $3.45 billion!
With a market cap of only $929 million, that’s a huge payday coming down the pipeline… and it’s just one of IGO’s projects in the hopper. Australia is a hotbed of mining projects, and the interest rate haircut will make exporting cheaper. For junior mining companies, this is great news. Investors could have a field day.
Keep in mind, some of these junior miners are great takeover candidates, too. If you’re looking to take advantage of the Australian mining boom and lower interest rates, now’s the time to do it. Small-cap companies could offer you a great advantage in this industry.
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