Investing in Mining Towns | Trilogy Funds Australia

Mining towns: Investor goldmines?

Big miners are restarting mothballed projects, juniors are making world-class finds, and there’s been a sense of stability, on the whole, in our resources sector for some time.

This begs the question… Are mining towns across Australia an attractive investment once again?

Investors likely remember the last cycle when regional destinations, from Karratha to Moranbah, reaped the benefits of a cashed-up sector. And, it’s even more likely that investors have a better memory of the comedown, or in some cases, the crash. Small towns dotted across regional Australia were ruptured. Property valuations, in some cases, fell north of 90 per cent.

Mining towns today

The ASX minerals and metals index (XMM) hit a 7-year high at the start of February 2019.

But, this time seems different.

There seems to be less speculation in the air. The last time things looked this good across the board was 2012, with the world price of Australia’s mining exports more than tripling in the decade prior.

Iron ore is the clearest mover to the upside, with Australia’s biggest miners of the steel-making commodity — BHP, Rio Tinto and Fortescue Metals — all making multi-year highs on the stock market too. Much of their efforts are concentrated on the Pilbara region in Western Australia.

Gold is glistening too. In Australian dollar terms, the gold price nudged against an all-time high in February 2019, again, with the greater Western Australian economy looking set to benefit the most from any subsequent boost.

Other commodities have been on more of a rollercoaster ride, although ultimately to the upside, such as nickel, copper and battery metals — not the least to mention coal. By reports, Asian demand for coal appears as strong as ever shifting the focus back to Central and North Queensland where most of Australia’s coal mining takes places.

But there is obviously unfinished business between the US and China.

What do these market conditions mean for investors?

For investors, commodity prices form part of the calculation with the terms of trade. It seems if terms of trade can keep at current levels or improve, the property market in regional areas may too.

Our Managing Director, Philip Ryan remembers in the last cycle the unfortunate situation where many investors speculated prices would forever increase.

“Houses worth $90,000 pre-mining boom transacted at $600,000 during the boom, of course now they have fallen back — Middlemount in Central Queensland, as an example, saw its properties plummet to about $90,000, and now post-collapse, houses are going for $150,000-200,000.”

Philip says it’s “very, very tough” to make a call as to whether a tiny town with a sudden influx of workers is a solid long-term investment. This is where expertise is worth its weight in gold. The Trilogy team bought two properties in Mackay, Queensland for the Trilogy Industrial Property Trust at the bottom of the cycle as a counter-play.

“Since we bought those properties, the general economy in Mackay is starting to improve quite markedly, coupled with an improvement in commodity prices. With Mackay being Adani’s operational hub, it will only further accelerate that.”

In its annual housing Boom and Bust Report published in November 2018, SQM Research noted the mining recovery is job creating, and “as much as people may wish to move to QLD, most won’t do it unless they can pick up a job”. That’s a good thing, added the report, because that was largely missing from 2012 through to 2016.

An Adelaide property with a well-heeled tenant is the most recent addition to the Trilogy Industrial Property Trust. This isn’t a mining product and therefore provides a cushion in case there is a decline in prices as a result of a trade war.

“We could worry all we like about China and the US but that isn’t going to change anything, all we can do is look at factors that mitigate risk, and hope that rational people will prevail,”

For more on the industrial property market, check out 3 reasons why we’re so passionate about it or take risk into your own hands and listen to our Managing Director’s tips for mitigating risk within your own investment portfolio.

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