Australian mining on the cusp of something explosive

Published in, August 2011 by Rebecca Richardson

Australia's established control of the global resources market has been questioned of late following a strong dollar, among other factors. 

So what has the government to say, and what knowledge should investors be arming themselves with?

Federal minister for resources and energy, Martin Ferguson, recently told the Leighton Telecommunications Summit in Perth that a dynamic industry constantly throws up new challenges along with the opportunities, and that finding ways to overcome the challenges is integral to Australia's long-term economic prospects.  

He pointed out that Australia does not have a copyright over mineral wealth or good governance, nor does it hold a monopoly on good new ideas.

"Indeed, given increasing skill levels in the BRIC countries [Brazil, Russia, India and China] in particular, but also in places like Chile, it is imperative that we, more than ever, focus on where we can improve the efficiency with which we exploit our resources and thereby at least maintain and hopefully increase our competitiveness," he said.

"We must nurture complementary industries that develop the tools, the processes, the equipment and services that make Australia a competitive destination for companies investing here and creating high-paying, high-skilled jobs."

Although it was fashionable during the 'dot com' boom to see the resources sector as an industry separate from the old economy, Ferguson said those days have passed.

"The reality is that successful resources and energy sectors are built on cutting-edge technologies that drive productivity from exploration to production."

LNG basins off the WA coast and through the Pilbara; large scale coal seam gas and liquefied natural gas projects on the east coast; and Shell's Prelude Floating liquefied natural Project, a project that is on track to be the world's first floating LNG facility, are all examples of new technology in mining that tap remote and stranded fields that would previously have been considered uneconomical to develop.

Obviously, Ferguson is optimistic that Australia's resources sector is not at threat.

Investment tips in an unstable time

But what about investor sentiment in those companies for the short to medium-term?

Over the past two months both the Dow Jones and the Australian market fell more than 14 per cent Janine Cox, senior analyst at Wealth Within, said 4 per cent of that, which occurred a fortnight ago, was amidst panic about the future of the US and world economies washing across world markets.

"When it comes to the share market, Warren Buffet's famous quote is to be fearful when others are greedy and greedy when others are fearful, and this is a comment I firmly agree with," she said.

"In my opinion there is no better time to focus on making money in the share market than following a substantial pull back like the one we are now experiencing as such a move is always followed by a wealth of opportunity to purchase quality stocks that have been sold down as investors try to liquidate their holdings."

Cox has 10 tips to ensure investors avoid pitfalls:

  1. Educate yourself and understand what you are investing in. "Many are willing to spend years studying to gain a formal education with the expectation that they will obtain a job. Yet when it comes to educating themselves about how to create wealth, they never quite find the time." 
  2. Don't over diversify. "Aim to have between eight and 12 stocks in your share portfolio as this rule lessens your risk, and increases your returns." 
  3. "Most importantly, learn how to set a stop loss to protect your capital in the event a share falls in value. I suggest 15 per cent below your buy price or 15 per cent below the most recent highest price." 
  4. "Find out for yourself, don't take tips from others as they are often less educated than you." 
  5. "Becoming rich through the share market is not about how much you make on any one investment, it is how much you do not lose. If you lost 50 per cent in the GFC then you need to make 100 per cent to get back to where you started. This rule means learn how to sell, and I know having this one rule would have saved the majority of Australians from the GFC." 
  6. Do what the rich do and don't follow the masses. "The rich don't follow the herd. It's the opposite -the herd attempts to follow the rich. The statistics are that those who are not rich tend to move their money into the market just before the peak and out of it after the crash. Remember Buffet's quote. Now is the time to be greedy and looking at buying for the long term, not being fearful and selling." 
  7. "If you are serious about making money for your retirement or lifestyle, don't make investing a hobby make it your business. After all your boss will not make you rich, that's your job." 
  8. Understand the pitfalls with buying investments just for income. "Don't be lured by high dividends - doesn't make it a safe investment and in current market conditions is often there to attract mum and dad investors who don't understand that it is pointless getting income if the risk to the capital is high." 
  9. Don't be a gold digger looking for cheap stocks, remember the tech wreck. "Buy only quality stocks in the top 100 shares on the Australian market. Cheap stocks may look attractive but they are often wolves in sheep's clothing." 
  10. Don't buy and hold as timing the market is more profitable than time in the market. "My research over the years and what I have done for my book proves that anyone can achieve good returns with a little knowledge and patience. Buy and hold will only get you poor to average returns, learning to buy and then selling at the right time yields far better returns and lessens risk."

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