China's GDP And Infrastructure Spending Supports Construction Equipment And Raw Materials

From the Chinese National Bureau of Statistics (www.china.org.cn/business/2012-01/17/content_24426253.htm)

Chinese economy grew by 9.2 percent in 2011 from a year earlier, the National Bureau of Statistics (NBS) announced Tuesday.

GDP growth for the fourth quarter last year stood at 8.9 percent year on year, said the NBS. The quarterly growth was the slowest in 10 quarters. China has set the full-year growth target at 8 percent in early 2011, after its economy grew 10.3 percent in 2010.

The country's economy expanded 2 percent in the fourth quarter on a quarterly basis, NBS chief Ma Jiantang said at a press conference.

According to preliminary statistics, the country's GDP reached 47.16 trillion yuan (7.26 trillion U.S. dollars) in 2011, Ma said.

Impressive numbers given the situation in the rest of the world. Q4 growth managed to beat estimates of 8.7%.  The release goes on to say:

NBS data showed China's industrial value-added output growth decelerated in 2011 from a year earlier to 13.9 percent year-on-year. The country's fixed-asset investment, a measure of government spending on infrastructure, rose 23.8 percent year-on-year. Retail sales, a key indicator of consumer spending, rose 18.1 percent year-on-year in December 2011, up from the 17.3-percent growth seen in November.

The infrastructure spending continues on a torrid pace and should continue to support construction equipment and raw materials/mining. I would expect metal/mining and equipment stocks to perform well today as participants focus on this news (as well as German investor sentiment) rather than the looming default of Greece.
On Monday, China's top statistical official Ma Jiantang stated that price increase pressures continue to pose a threat despite the lower 4.1% CPI in December.

In the short run, fixed-asset investment, which remains a major engine driving economic growth in China, is expected to maintain rapid growth in 2012, while residential consumption, another growth engine, will keep stable growth this year, he said.

www.china.org.cn/business/2012-01/17/content_24425203.htm
This continues to support the prospects of both resource economies and companies.

Metals and Mining - Can You Dig It?

As commodities continue to roar into the new year, we continue to see deals being proposed (and upped) as more firms continue to try to source raw materials and financial players see the potential for decent returns.


I believe we will continue to see more deals taking place and more capital being spent on purchasing and developing resources.  This will, of course, continue until firms start paying uneconomic prices for resources, believing that growth - and hence prices - will continue to rise for the foreseeable future.  Thats said, you don't stand in the way of a speeding train - you try your best to board it, ride it and jump before the tracks give way.



From the FT:

The rival bidders for Baffinland Iron Mines have both sweetened their bids over the new year period, escalating the battle for control of a vast undeveloped iron ore deposit in Canada’s high Arctic.

Nunavut Iron, an acquisition vehicle backed by Energy and Minerals Group (EMG), a US private-equity firm, said late on Friday night that it would offer C$1.45 a share for Baffinland, valuing the company at about C$570m.

Nunavut’s move came less than a day after ArcelorMittal, the world’s biggest steelmaker, lifted its bid to C$1.40 a share.

ArcelorMittal is bidding for all Baffinland’s shares while EMG would buy only 60 per cent.

The battle underlines a global scramble for access to raw materials amid concerns of looming shortages. The latest offers value Baffinland at double the amount offered by Nunavut when it made its first hostile approach in September.

With planned annual production of 18m tonnes over a life of at least 20 years, it is viewed as one of the world’s best undeveloped deposits. Baffinland plans to develop the deposit into a mine at a cost of C$4bn.

 Full story here: FT on Baffinland

And how has that train performed so far, you ask?  Here's the parent sector:

And the sub-sector:

Pretty well I have to say.

Drilling down (yeah, I am that clever):

Source:  Finviz.com

Looking at the above table with respect to forward P/E, it would appear that there is further room for growth.

I am still a buyer of select basic materials (metals/mining) debt and equity as there is still room for fundamental growth and momentum.  That said, I am also wary of M&A activity as the potential balance sheet erosion could affect these firms.  As always, analysis is the key - look for balance sheet headroom, covenant headroom and business location.

Mining Victory in Australia

A victory for ore and coal mining companies in Australia.  Essentially, the government has restricted its ability to raise taxes/royalties in the future.   This adds to the attractiveness of the mining space across the capital structure.


WSJ:

Australia's mining giants won support on key concessions in the battle over taxes on the country's $71 billion iron-ore and coal-mining industry, dealing a blow to government efforts to limit credits on future royalties.

The tax proposals have been a flashpoint of national debate this year, prompting the ouster of former Prime Minister Kevin Rudd and almost toppling the now minority Labor government.

The government's Policy Transition Group, chaired by former BHP Billiton Chairman Don Argus, said after five months of consideration that future royalty increases imposed on mining companies by Australia's state governments should be credited against federal taxes.

The government had previously insisted that only current royalties, not future ones, would be credited to the miners.

The Minerals Resource Rent Tax will impose an effective tax of 22.5% on mine operating profits more than 7% above the long-term government bond rate—equivalent to a profit margin of 12.56% based on the current yield on 10-year government debt—once miners earn more than 50 million Australian dollars a year in profits. In contrast to the previous, it will apply only to coal and iron ore—the most-profitable mined commodities.

Coal - The New Black Gold?

New York Times:

At ports in Canada, Australia, Indonesia, Colombia and South Africa, ships are lining up to load coal for furnaces in China, which has evolved virtually overnight from a coal exporter to one of the world’s leading purchasers.

The United States now ships coal to China via Canada, but coal companies are scouting for new loading ports in Washington State. New mines are being planned for the Rockies and the Pacific Northwest. Indeed, some of the world’s more environmentally progressive regions are nascent epicenters of the new coal export trade, creating political tensions between business and environmental goals.

Traditionally, coal is burned near where it is mined — particularly so-called thermal or steaming coal, used for heat and electricity. But in the last few years, long-distance international coal exports have been surging because of China’s galloping economy, which now burns half of the six billion tons of coal used globally each year.

Vic Svec, senior vice president of Peabody Energy, the world’s largest private coal company, said it was “planning to send larger and larger amounts of coal” to China.

“Coal is the fastest-growing fuel in the world and will continue to be largely driven by the enormous appetite for energy in Asia,” he said.

 The growth and shifts in coal exports to China are impressive, flowering even during the recession. Seaborne trade in thermal coal rose to about 690 million tons this year, up from 385 million in 2001.

The price rose to $60 from $40 a ton five years ago to a high of $200 in 2008. Coal delivered to southern China currently sells for $114 per ton. 

Although it has plentiful domestic supplies, China imports coal because much of its own is low grade and contains impurities. Coal from the Powder River Basin of Montana and Wyoming tends to be low in sulfur, for example, allowing power plants to burn more without exceeding local pollution limits. 

Another emerging customer is India, whose coal imports rose from 36 million tons in 2008 to 60 million tons in 2009, the last full year for which data is available. 

Read the rest here:  NYT on Coal

Personally, I am a believer in coal and the ability to use coal in a "cleaner" state.  read up on coal gasification and sequestration.  Like it or not, The US produces an awful lot of coal and has some of the highest quality stuff - high BTU, low sulfer.  Always look at the difference between thermal coal and met coal and who produces which (production of both helps partially mitigate the volatility in met coal prices). 

In equities, I like the diversified miners (Vale, BHP, Rio) and think that there continues to be upside in the names.  Peabody Massey and Arch are interesting, but the focus can cause volatility and while multiples on all miners are high, they are higher on coal focused (although I keep in mind that increased demand will also help jack go-forward earnings and lower forward multiples).

From a debt perspective, I like BHP, but worry about their big game hunting (where to now that POT went up in smoke? - Come on, that's humor!), leaning more towards RIO and Vale.  Cliffs is another I like (more ore biased and also looking for an acquisition - hedgies blew apart the alpha deal).  Also digging into Alcoa as there might be something there.

No preferred that I am aware of in the sector.