How to Play a Global Transformation…Now!

We’re at the cusp of another major transformational phase in our society.

You can see it around you.

I was in Sydney earlier this month to attend a friend’s wedding.

Normally I’d drive to the venue and park there. But given the event was held at Barangaroo, I wasn’t too familiar with the surrounding area.

It’s made more complicated for drivers since trams started running in the Sydney CBD.

So Cindy, Cyrus and I took the Metro from my parent’s place in the Hills District to Barangaroo.

I was surprised how much the route changed since I last travelled on this train line two years ago.

Without going into too much detail, those who live in Sydney know that several Metro stations popped up across the city recently. Some lines were rerouted, and several stations underwent major renovations.

Sydney’s transformation underground is certainly eye-opening.

But all this can’t happen without these key industries – mining and mining services.

Awakening the next building boom

Looking back these few years, we’ve seen how the lockdowns revealed how policy errors caused a lasting negative impact in all aspects of life.

Firstly, paying businesses and households to stay home crippled productivity and unleashed an inflation wave that still ravages many today.

Secondly, the lull in physical business activity (not shuffling assets in online exchanges or building a virtual reality world) left many cities in decay, revealing the dreadful state of infrastructure worldwide.

Thirdly, the loss of productivity and economic decline have caused a drop in marriages and births in many developed countries. Governments tried papering over the budget deficit and population decline by spending heavily on building, among other things.

Whether it’s for the right reasons or otherwise, Australia is undergoing significant changes, that’s for sure.

I’m sure many of you who live in a major city feel similarly about how much your neighbourhood is changing.

Even in regional centres, councils have re-zoned land to develop new houses, shopping areas and industrial parks.

And this trend is happening worldwide. The momentum is set to increase with time.

Some say we might be on the cusp of another commodities and construction supercycle.

However, it might play out differently this time.

Let me show you how I come to this conclusion.

History rhymes

The last ‘Commodity Supercycle’ kicked off the back of China’s construction boom.

You know the story…it imported coal, iron ore, copper, mineral sands, aluminium and other resources to fund its mammoth projects.

China built tens of billions of dollars’ worth of residential blocks, commercial hubs, utilities and its network of high-speed rail lines that criss-crosses the country today.

Australia and Brazil benefited significantly from this.

The resources and mining sector enjoyed a significant flow of funds, enriching many who invested in the right commodities and assets.

Many of Australia’s richest are mining magnates who made their fortunes during that boom.

Looking ahead, I believe that history will rhyme, but not repeat.

With President Trump’s impending return to the White House, I expect international trade will undergo a reset.

China has long played a big role as the world’s factory. However, a combination of the world’s reliance on China and the government’s policies in response to this threaten the country’s social stability.

While living standards increased dramatically thanks to foreign businesses moving to China to manufacture cheaply, labour costs have risen over time. So have living standards.

But since China’s financial markets are less mature than that of the developed nations, most Chinese citizens focus on investing in real estate. This has created a massive bubble, with many cities already seeing their property prices suffer a large correction.

Property prices in even the top-tier cities are following the lower-tier cities in their decline, often with catastrophic social and financial consequences.

This social instability could spur the Chinese government to impose new regulations or measures. The uncertainty could lead to foreign companies relocating to avoid these problems.

Furthermore, the rise of nationalist and populist governments in the West will lead to more onshoring of trade and production. That could further cause an exodus of businesses out of China.

The current state of play may sound negative for China, but I believe it’ll remain a major economic power. The difference is that other countries will take its place as the preeminent factory and supplier of the world’s goods.

How an upcoming commodities supercycle benefits mining and mining services

I’ve outlined my thoughts on how global trade could change in the future as countries realign themselves.

But what won’t change are the growing demand for materials to fuel this construction phase.

Countries in regions endowed with rich resources will benefit from this change should it happen. After all, you need minerals for building. Where there are plans to build big, so will the demand for resources increase.

As President Trump said before, it’s ‘drill, baby, drill’. Mining companies are going to enjoy a resurgence of activity.

And what about mining services companies? If you have followed this sector, you’ll notice how several companies including Downer EDI [ASX:DOW], NRW Holdings [ASX:NWH] and Perenti [ASX:PRN] are trading at their highs post-2020.

On top of that, investors enjoyed a solid dividend payout from these companies. Downer EDI paid 17 cents for the year, NRW Holdings paid 15.5 cents and Perenti paid 6 cents.

That’s a dividend yield of over 4-5%, at current prices. I haven’t accounted for franking credits which could mean a higher yield.

So why are these companies worth considering for the upcoming boom?

Not all resource companies operate with in-house equipment and staff. Retaining a large inventory of equipment and personnel can weigh on the company’s balance sheet. Some hire contractors and rent equipment to deploy onto their sites when needed. This helps them manage their running costs and maximise capital return.

As commodity cycles wax and wane, it makes sense for some mining companies to engage mining services companies to assist rather than run everything in-house.

The recent lull in the commodities cycle didn’t detract from the performance of these companies. So mining services companies are a good way to diversify your portfolio while giving you a chance to receive a generous dividend payout.

A chance to capitalise on this exceptional opportunity with our all-in-one service

I am quietly confident about a bright future for commodities and construction going forward.

The US could lead the way in breaking the deadlock created by the petrodollar system, central banking monetary policy failures and a fragile supply chain that is overdependent on cheap labour. That could trigger a renaissance for mankind.

Countries could become more self-sufficient and living standards improve.

All this hinges on a strong mining industry with efficient operations, aided by mining services companies.

Should you believe this is the way forward, now’s a good time to consider building some positions in quality companies that could benefit from this transformation.

My colleague, James Cooper, could guide you to do so. He’s an experienced geologist turned commodities analyst.

He has worked in Australia and Africa, exploring and developing various mining projects, which qualifies him to identify where the best opportunities lie.

Find out more about what he has to offer in his latest presentation this Friday. Sign up here!

God bless,

Brian Chu,
Editor, Gold Stock Pro and The Australian Gold Report

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