Riding the Iron Ore Bonanza

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Astonishing. There can be no other word for it. Fortescue Metal’s supremo Twiggy Forrest will bank $1 billion in dividends this financial year.

A billion!

I made the case on Monday that the big iron ore miners were dead on track to pay out some of the cash gushing into their coffers.

We had to wait one day.

Fortescue came out yesterday and said it would pay out a special 60 cent dividend before the end of the financial year.

Management want this done before the federal election.

Markets are designed to astonish us all. It doesn’t seem that long ago that the worry around Fortescue was its lower grade of ore relative to BHP and Rio Tinto.

Fortescue says its realised price has surged 47% over the same time that the headline grade has risen 32%.

This is the astonishing thing about the Aussie market right now. For all the fuss around the trade war, it is simply not showing up in distressed commodity prices.

Iron ore was US$72 a tonne in January. It’s now around US$95. Coking coal is over US$200. Oil is the second best performing asset this year after bitcoin.

US tariff policy may even be a boon for Australian LNG producers. China’s retaliation means that US LNG will cop a 25% tariff from 1 June.

Chinese buyers are much more likely to source it from Australia, Papua New Guinea or Qatar now.

Andrew Forrest is cashing in. Why not you?

You might be surprised to hear that the ASX has proved to be one of the most resilient markets in the latest round of tariff tremors.

See for yourself from the paper this morning…

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Source: The Australian Financial Review

This supports my contention on Monday that the ASX may outperform the US market over the rest of the year.

The mainstream media is forever blabbing on about the ‘Australian economy’. This may indeed be growing relatively slowly.

But Fortescue is perfect proof that a specific and very profitable opportunity can present itself despite this backdrop. Here’s another one you should look at.

Who says iron ore can’t go even higher this year? Any big further move up would be astonishingly bullish for the mining sector.

But you might still be worried about Australia’s high debts and wobbly property market. Well, there’s some very interesting news on that front.

The Australian Financial Review reports today that a Sydney developer has raised $50 million from private investors to acquire apartments at distressed prices[1].

They’re looking to raise $150 million more once they have the necessary licence to move forward.

The strategy is to rent the apartments out in the short term and await the next upswing. They may not be acting alone here. There’s plenty of private capital available.

I’ll leave you to think about the merits of this strategy. That’s not our concern for today. The reason I bring it up is that this type of behaviour helps remove the potential for credit distress around developer loans.

Private capital to prop up Aussie property

If this type of money can soak up the excess apartment supply, I see much less chance of defaults hitting the banks that have made the loans.

Also of note is that there seems to be a strong view forming among property players that the tough conditions will continue for another 12-18 months only.

Another group of rich family offices is setting up funds to lend to the developers that the banks won’t touch[2].

Immigration levels in Australia are still high, and interest rates and unemployment are low. Of course, opinions are like the proverbial — everyone has one.

But we can test this view in other ways. One is via the market for securitised loans. You might know these as mortgage-backed securities. These are the dominant type issued here. 

Either way, the idea is pretty simple at the core. A bunch of loans are bundled together and sold off as single security. Investors buy them for the income stream generated by the mortgages.

A report was just released on this market for Australia, according to The Australian.

It says the data for securitised loans shows arrears across these loans are at low levels. The banks and financial firms that issue them are not afraid to issue more in the future, either.

If Australia was on the verge of some massive credit crunch, it’s reasonable to expect at least some sign of distress or difficulty in this market.

It’s actually the opposite. These loans currently have an arrears ratio lower than the banks.

Everything I see suggests the same thing. Don’t let the continual mainstream fearmongering stop you from taking advantage of the stock market. Go here to get started.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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