Changing of the guard
25 Aug 2010
HAVING read some of his books and articles I was a bit of a Niall Ferguson groupie before seeing him speak at Diggers and had high expectations. He exceeded them. Someone commented afterwards that his slides were of very poor quality to which I could only respond, “did he have slides – I didn’t notice?” It was powerful stuff, entertainingly delivered, but admittedly painting on a canvas that extends well beyond the average attention span of attendees who just want to know where copper or gold will be at Christmas.
I think it would have been very interesting if we could have had “the worm” running while he spoke with attendees showing whether they were bullish or bearish based on his observations.
I couldn’t help think that the perma-bulls would have loved “the rise of China” theme and the obvious increase in washing machine and fridge sales. For me there was a more subtle undertone that this is not just the rise of a new empire but the death of another. I can’t help but think the incumbent emperors won’t go out without a fight or war; financial and/or physical. A struggle of the type described by Ferguson will surely mean substantial volatility and regular periods of great uncertainty not just ever upward commodity prices. Ferguson’s suggestion that he had it on good authority we won’t see the “expected” quantitative easing any time soon because China has told the US they won’t tolerate it, seems incredible but since Diggers we have seen equities sell off heavily because we haven’t seen the level of quantitative easing that was widely expected.
We have also seen the US move its joint naval operations with South Korea from the west coast of the Korean Peninsula, off China, to the Sea of Japan on Korea’s east coast because the Chinese said they weren’t happy with the proposed venue; so much for the once mighty US bond market and US navy.
I came away from the Ferguson talk and Diggers in general, which I thought was very upbeat, thinking buy agricultural stocks, water stocks and junior miners and sell the major miners. Why? On Ag’s, if the Chinese are to fight a war, economic or otherwise, it’s well-known truism that an “army marches on its stomach”. In this long march keeping the “troops” well fed and watered will be more important than ensuring they have a washing machine or an electric car. Waiting a year for white goods or a flatter TV is tolerable, going without food or water is not. On selling major and buying emerging miners it’s because I believe the majors are just too big to navigate the volatility and changes that are likely ahead. They are the proverbial oil tankers with 3km turning circles and 10km stopping distances that just aren’t going to fit with the waterways that will need to be navigated. On the flipside we have seen only too clearly how guerrilla warfare can compete with and outmanoeuvre the most well equipped of armies. This is the role our emerging miners need to take.
Clearly, I am not alone in thinking the agricultural sector might not be a bad place to be judging by some of the recent corporate activity in Australia. In many ways the Australian agricultural sector reminds me of the mining sector in the late 1990s. Ravaged by years of declining revenues, confidence within the sector is rock bottom. Revolving doors for CEOs, plummeting share prices, scandals; the Ag’s have had it all over the last few years. When it looks like it just can’t get any worse it probably can’t, but you might need to be patient. Think Newcrest in the late 1990s then think Newcrest now (okay you still have to be patient but the share price does look a great deal better than it did 10 years ago).
Looking at the recent interest from overseas in the Australian agricultural sector I am clearly not alone in my view but equally it is not a universal view. Take CSR for instance. They have agreed to sell the family jewels just as the fun only seems to be starting. In that case I suggest you might find a better mining analogy if you think the last days of MIM! Where were the custodians of our future, the managers of our super, while this was going on? The government shouldn’t wonder why Queenslanders are a tad upset! We won’t miss Kevin in years to come like we’ll miss owning our sugar industry.
The recent announcement by BHP to buy Potash Corporation initially dented my enthusiasm for this sectoral play a little because if they are overpaying to be involved perhaps I am better off short selling the sector; certainly they have form in this regard. I have decided instead to consider that theirs is a good idea poorly executed – they have form in that regard as well. At least they are consistent I suppose and again it demonstrates the clear limitations of their size and its impediment to doing things that are both smart and relevant. It seems to me they are justifying buying the company on a much higher multiple than they trade because once they own it they will be able to drive the potash prices up. Here they go again ignoring the age old adage, “buyers make markets”. Simple they say, break down the pricing structure that has worked for years, push everyone to spot and then screw your customers. All I can say is that’s a recipe for a possible short-term gain and long-term pain. Why? Because your buyers might put up with it in the short term but in the long term they will do everything they can to avoid buying from you by supporting/partnering with your key competitors and developing and exploiting lesser resources owned by more reasonable people (or third world despots if necessary).
This last point takes me full circle to why my take on Niall Ferguson’s presentation was buy agricultural stocks and junior miners and sell the major miners. A nation at the stage China is at wants certainty of supply above all else. Certainly the less you pay the faster you can develop, so price is important, but you must know you can meet your (people's) basic needs come hell or high water. Suppliers who seek to take advantage of you short term without paying respect to your long-term value to them are not to be trusted and should be used only until you can walk away from the table and never return, or only on your terms.
The junior /emerging mid-tier mining sector is pragmatic and energetic, it values buyers (and its shareholders) in a way the majors don’t.
It will partner with China; backs will be mutually scratched. There is an Arabian proverb that states “the enemy of my enemy is my friend”. After their recent efforts in Canberra the only people who possibly dislike our majors more than the Chinese are our junior and mid-tier miners!
If you want to buy proxies on the changing of the guard in China and our mining sector, buy the well-run, well-intentioned, end of our mining sector (not the top tier) and anything in the agricultural/water sector that hasn’t already been snapped up by Singaporeans and Canadians, who clearly recognise the long-term value here that our local managers and owners seem to have simply given up on.