Crying wolf again? We'll see

IN THE dark days of the global financial crisis it was easy to plunge into doom-laden thought. Suddenly, that mindset seems to be returning, with a twist. The Outcrop by Robin Bromby.
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Staff Reporter

Almost exactly three years ago, I came over all gloom and doom in Australia’s Mining Monthly, sister journal to this news service.

Of course, the timing was all: that issue of the magazine hit the streets in May 2009 just as the market took off in what was an impressive rebound. It was a rolled gold case of crying wolf and suitably blush-making as I re-read my words in the months that followed.

I was undone by quantitative easing. Money printing made a fool of me.

At the risk of further humiliation, I think it’s time for another serious warning to all those running mining and exploration companies.

This how I saw it in early 2009: “If you are running a mining or exploration company, there is no time to waste. Events are now shaping up to strike at the very reason miners are in business: that is, to supply metals for industrial uses”. I believed the collapse of Lehman Brothers and dramas at Bear Stearns and AIG were the “phony war” with worse to come.

I advised all you out there: “You need to get to grips with the three Rs. No, not those ones. But, rather, Review, Restructure and Re-invent (yourself)”

The general thrust was that all companies had to batten down the hatches, capital would dry up, commodity prices fall, etc. In other words, things were going to be tough and only the strong would survive.

Well, as we all know, commodity prices bounced (not all the way back), juniors started raising fresh money in sums that were impressive even by 2007 standards (although IPOs had a much briefer day in the sun) and the Chinese were still lining up with their cheque books.

And the euphoria has been remarkably robust and tenacious. Money is still being raised – just this morning a junior announced a $4 million raising, another one of $9.15 million. And yesterday’s Financial Times reported the world’s largest commodity trading houses are looking to bring in more investors to allow them to expand their businesses beyond just buying and selling of raw materials.

Today’s edition of that same newspaper carries the headline “Industrial metals bulls point to uplift by the end of 2012”

So I realise I am rowing against the tide.

However, we all got out of the 2008 scrape by money printing.

Surprisingly, this time around, Europe has decided to go down the opposite route – austerity. We know how well that worked in the 1930s and again in the 1990s in Japan.

Consider these figures out overnight: over the March quarter, demand for housing loans has dropped in Europe, not only in the Club Med countries (down 70% in Portugal and 44% in Italy) but also in the apparently strong northern EU members. In the Netherlands applications for home mortgages were down 42% on the December quarter. Business loans in Italy were down by 38%. As one commentator remarked, “this amounts to an economic shock”. On top of this, it is now being forecast the Greek economy will contract another 5% by the end of the year. Imagine the pain.

The nine biggest US banks reportedly have exposure to derivatives totalling $US228 trillion, far greater than the size of the global economy. Think nothing could surprise us there?

But, unlike 2008-09, there’s a new element this time – political instability.

Three years ago, nothing much changed on the political scene around the world.

This week the Dutch government fell over economic policy; we have seen Italy and Greece lose their elected governments and are now being ruled by appointed officials; and France is likely to toss out Sarkozy in the run-off presidential poll. The voting patterns, and polls, indicate a huge move in public mood (look at Queensland) around the developed world.

Austerity sure ain’t working in Europe, and you have to wonder whether money printing still can. After all, the Fed, Bank of England, Bank of Japan and European Central Bank have together created more new money in the past three years than they did in the previous 50. Just how much more money can be pumped into the system and still have some effect?

To me, it seems that this time around, there are not many levers to pull to halt the financial crisis developing.

Crying wolf again? Possibly.

But, if I were running a resources company, I’d just be proceeding with great caution, considerable financial prudence and making sure my projects could withstand a sharp metals correction.

This article first appeared in ILN's sister publication

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