Why Australia Could Become the Next Stock Mania

Nathan Tinkler is a pawn in the strategic chess match for Australia's resource wealth.

But he's a pawn as rich as a king. And he owes it all to coal.

In November 2006, Tinkler, a 32-year old former electrician, bought the rights to a relatively unknown coal deposit in Northwestern Australia. He paid $1 million for it.

Last year, Australian producer Macarthur Coal bought a majority stake for $270 million. Tinkler celebrated by spending $19 million on 56 racehorses at the Magic Millions horse auction on the Gold Coast. Turning coal into horsepower... what a trade, eh?

The story doesn't end there. Tinkler just got a $400 million payout when ArcelorMittal, the world's biggest steelmaker, spent $632 million on a 14.9% stake in Macarthur last week.

The move surprised at least two other predators in the Aussie coal sector. Global mining giants Xstrata and China's CITIC Resources have also been trying to acquire stakes in Macarthur Coal.

You see, steelmakers need huge amounts of coal to fire their furnaces. And these firms have the same basic strategy: secure access to Australian commodities by buying the companies that own them. You could call it "mining in the stock market."

For Chinese companies, this is part of a larger "Grand Strategy" to source raw material needs from Australian companies. The strategy for the rest of us is simple... Buy resource shares before China does.

Here's what former Goldman Sachs VP Kenneth Courtis told the AustralianFinancial Review just a few weeks ago:

China wants everything you've got, everything. And we still can't fathom the demand that China is going to generate in the years to come... Imagine another 250 million people urbanising China over the next 20 years. What do you think that does to copper prices, iron ore prices, even given the levels they are at today?

Over the next two, three, four years, Australia could become really hot. You could see your stock market move a little bit like the Japanese market did in the 1980s or like the tech market did in the 1990s.

The first-ever hostile bid by a Chinese company for an Australian miner is nearing the finish line... Steelmaker Sinosteel recently raised its bid for iron ore junior MidWest from A$5.60 to A$6.38 per share.

But for months now, the big story in the Aussie market has been China Inc.'s stealth invasion of Australia through the stock market...

The Australian newspaper reported "Chinese interests" are considering a bid for 9% of BHP Billiton, Australia's largest resource company. The direct strategy would be to knock on the front door and ask for a chunk of stock.

That's not exactly subtle, and not likely to be well received. (You might recall the backlash when the Chinese National Offshore Oil Corporation tried to buy U.S.-based Unocal. The U.S. government blocked the bid.)

But it looks like China is taking the indirect approach, partnering with an Australian fund and a large foreign company (probably American) in the deal. If only one of the three parties to the bid is Chinese, then it looks less hostile, and it's more likely to get the approval of Aussie regulators.

If you look carefully at this statement from China's National Development Reform Commission (NDRC), the "Grand Strategy" comes into focus: "With iron ore prices rising explosively, many domestic firms are very enthusiastic about investing in overseas mines, which needs strengthened macro guidance from the country."

In other words, commodity prices are soaring. China desperately needs them. And the state government will support nearly all Chinese attempts to buy assets. That includes backing takeovers in Australia.

We'll see how far the Australian government will allow China to "infiltrate" its commodity sector... but it's clear both countries need each other. As long as the China boom continues, the Aussie resource boom will continue.

It's the kind of crossfire you want to be caught in... And the next four or five years may be the best time you'll ever see to make money in resource stocks.The right move for the rest of us is to get acquainted with Australia's resource shares. They are the object of a large global bidding war – one that could shoot this stock market into mania mode.

Good investing,

Dan Denning