I left you yesterday with the idea that the current China spook rolling through the markets is…
- Not as bad as most believe, and
- may already be over.
Iron ore is lifting in symphony with this idea. Today it’s trading for around US$113.
Don’t forget that it’s US dollars we’re talking about here with this.
Considering the Aussie dollar’s latest swan dive to 64 cents, most iron ore miners selling into this market are making very good money.
What’s even better, as an investor, is that the current bearish narrative around China has suppressed the stocks.
That means you can get a look at them with a lot of the risk bashed out of them, at least, as of now.
Iron ore stocks: am I crazy?
Maybe. But you can pay a heavy price for a cheery consensus in the market.
Case in point…
Investing forum Livewire polled their readers at the start of the year for their favourite small-cap idea for 2023.
The crowd voted for Arafura Rare Earths.
Here’s how that’s been going since February:
|
|
| Source: Yahoo Finance |
What’s going on here?
One issue was clearly the valuation at the peak.
However, Arafura only has a deposit and a plan at the moment. It’s not a working mine and needs to raise a fortune to create one.
That’s a problem in this market for any stock.
Here’s why…
Costs for any construction project are skyrocketing, and the junior resource market is in a tight market for money.
Any companies raising cash are offering big discounts to investors to get them on board.
In other words, it’s a tough market for the non-producing resource stocks.
At least some of the junior iron ore plays are producing, profitable, and have big cash backing. You can say the same about a chunk of the gold stocks too.
Then we just see where the market goes from here. Two of my colleagues believe that iron ore is now in structural decline because of fading China demand.
I’m not so sure they’re right. One reason for my hesitancy is we now have the rise of ‘green steel’ and decarbonisation.
Wind farms aren’t made from wood, and they’re the size of skyscrapers. But we also have Asia, India, and Africa rising in general that will offset some of the lost Chinese steel impetus.
Anyway, I’m not forecasting anything here. All I’m saying is that it’s a case of watching developments day by day.
Chinese property has been in a rolling crisis for three years and yet iron ore has basically been around US$100 the whole time.
There’s been big cash flows and dividends for anyone with the guts to stomach the volatility.
According to the bears, iron should have been US$50 long ago.
Then we have the gold stocks. I’m licking my lips at the set up here on some of them.
They’ve been treading water for a few months, but again, margins for Aussie gold producers are very tidy. Lower-cost African producers are even better and can mint a fortune!
All we need here for the fun to really start is for gold or iron ore to go for an unexpected rally and some stocks here could really rip.
Good news for you, two of my favourite small-cap stocks in these two sectors are in my latest report.
It officially goes out today for your enjoyment and, I confidently hope, benefit.
I’m not like most commentators. I think now is a time to be getting active and aggressive in the market. The returns on offer are substantial.
Now of course, I’m not blind to the risks here. It’s part and parcel with small-cap investing that these stocks can go nowhere or fall down just as fast as they can rise.
That’s why being adept enough to ‘follow the money’ is a key component of success in this space.
Here’s another case in point…
In May, I told subscribers to my Australian Small-Cap Investigator advisory that artificial intelligence was clearly going to be the next ‘hot’ theme in the market. I gave them three small-cap ideas to play it.
One of those happened to be a stock called Nuix [ASX:NXL].
It’s hard to describe what a train wreck this stock has been since it listed on the ASX.
Back in May, it looked even uglier than iron ore stocks probably seem now.
I told my readers that very fact.
But the market is a forgiving beast if it gets a strong whiff of growth and profit again.
Yesterday’s dog can become tomorrow’s star if the stars align. Nuix is now up nearly 70% in less than six months.
This is another reason I have no truck with people who are gibbering on about staying in cash and being defensive.
The market throws up opportunities all the time.
The first step is to start watching, reading, and following ideas. I followed Nuix for two years before I recommended it.
Here are five to get you started.
Best wishes,
 |
Callum Newman,
Editor, Money Morning
