THE LUCKY COUNTRYReuters/ Tim Wimborne

OCTOBER 2010

Australia is known as the “lucky country”, abundant in natural resources and well placed to meet Asian demand. While enjoying one of its biggest trade booms in a century, policymakers know that managing the nation’s good fortune will be a challenge.

BY

W

WAYNE COLE SYDNEY, OCT 20

AUSTRALIA is in the midst of a modern gold rush as voracious Asian demand for resources

stokes a boom in mining investment that should last years, setting it far apart from much of the rest of the developed world.

And since the sea change is being driven by export prices and incomes, brisk growth in GDP actually understates the true strength of the A$1.3 trillion economy.

“For the resources sector, things look resplendent,” says Paul Bloxham, an economist at HSBC who until recently worked at the central bank. “And global fears of a double-dip notwithstanding, there are few clouds on the Australian horizon.”

“Many of the projects that are expected to support investment growth are multi-year projects and have already commenced,” he explains. “And the level of mining-sector engineering work yet to be done is positively stratospheric.”

That is a major reason why he expects the Reserve Bank of Australia to raise interest rates to 5.75 percent by the end of next year, from 4.5 percent now.

To say Australia is rich in resources would be a gross understatement.

It is the world’s largest exporter of coal and iron ore, the biggest producer of bauxite and alumina, second in uranium and fourth in black coal. It has the largest reserves of lead, nickel, uranium and zinc and is a major producer of diamonds, gold, gas,

oil, beef, wheat, wool, copper and cotton.

And it happens to be in a region where the largest urbanisation in history is underway in China and India. In the past decade, 400 million Chinese have moved to cities, and a similar trend is expected in the next 10 years. That requires a lot of the resources Australia has, driving prices sharply higher for many of them. The resulting numbers are staggering for a country of just 23 million people.

Export earnings from food, minerals and energy are expected to reach a record A$215 billion in the year to June 2011, a jump of 26 percent from the previous year.

Miners, confident the industrialisation of over two billion people will suck in resource exports for years to come, have embarked on a record investment binge.

AUSTRALIA RESOURCE RUSH TO SPUR ECONOMIC BOOM

2

Australia current GDP growth outpaces real GDP

Source: Australian Bureau of Statistics

22/09/10

Percent change from previous quarter

Real GDP

Q1 Q2 Q3 Q4 Q12006 2007 2008 2009 2010

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2-2

-1

0

1

2

3

4Current GDP

Australia private construction

Source: Australian Bureau of Statistics *Till Q2 2010

Reuters graphic/Christine Chan

22/09/10

Value of private construction yet to be completed, quarterly data – A$ bln

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010*0

20

40

60

80

100

THE LUCKY COUNTRY OCTOBER 2010

ECONOMY ENJOYING A BOOM THAT IS LIKELY TO LAST YEARS

URBANISATION IN CHINA AND INDIA A MAJOR FACTOR

TRUE STRENGTH OF ECONOMY UNDERSTATED

WILL KEEP PRESSURE ON CENTRAL BANK TO KEEP RAISING RATES

The value of engineering work yet to be done has more than doubled in the past year to top A$86 billion, while firms plan to expand overall investment by a fifth in 2010/11 to A$123 billion.

GUSHER OF INVESTMENT

The Gorgon liquefied natural gas (LNG) project alone will cost A$43 billion over four years. Australia is the sixth-biggest exporter of LNG worldwide, and projects worth A$200 billion could take it to second place within five years.

Analysts at JPMorgan estimate that total resource projects underway, planned or under consideration amount to A$725 billion, or nearly 60 percent of Australia’s annual GDP.

Once embarked on, such large multi-year projects are rarely abandoned no matter how external circumstances change in the short-term. That was a point underlined by the RBA’s chief economist, Philip Lowe, last month. “The investment that’s taking place in the resources sector is motivated by the long-term growth of Asia, and most of it has a horizon of decades,” Lowe told a conference. “There’s continuing uncertainty about the strength of the global economy... but for those business focused on China, on India and Asia, that’s driven by the medium-term outlook.”

Thus, while a government plan for increased tax on iron ore and coal profits produced much hand wringing by miners in recent months, not a single major project was cancelled.

Instead, new spending plans are announced almost daily. Rio Tinto this month said it would spend A$803 million to expand its Argyle diamond mine, in part to meet demand from newly rich Chinese.

PEOPLE LIVE IN A NOMINAL WORLD

While all this investment will support growth, the flood of money from exports has already made itself felt. Indeed, because headline GDP data is “real”, or adjusted to remove inflation, much of the boost from export prices is understated.

Real GDP grew by 3.3 percent in the second quarter, compared with the same quarter a year before, a decent enough performance in the developed world. But growth in nominal or current price GDP was an astonishing 10 percent for the year, a pace normally enjoyed by developing countries.

In the second quarter alone, nominal GDP outstripped real by A$30 billion. For the year to

June, the gap was A$77 billion, or A$3,483 for every person in the country.

Nominal growth in the United States was 3.9 percent for the same period, only modestly ahead of the real 3.0 percent. In typical recoveries, nominal growth is double or triple the adjusted pace, perhaps one reason the economy feels so sluggish.

That’s still a lot better than Japan, where years of falling prices had dragged nominal GDP to levels seen in the early 1990s. For Australia, a better measure of its fortunes right now is real gross domestic income since it adjusts GDP to account for the jump in the terms of trade. This climbed 4 percent in the second quarter, from the first, the biggest rise since 1973 and left it 8.2 percent higher for the year.

This shower of cash showed up in company profits, which climbed 20 percent for the year, while wages and salaries increased by almost 6 percent even as employment surged.

Households responded by spending big on new cars, travel, culture and leisure, much to the chagrin of the central bank which had been hoping that a more cautious consumer would make room for the mining sector to boom without stoking inflation.

“Key parts of the Australian economic story look set in stone,” says Commonwealth Bank chief economist Michael Blythe.

“And it’s double-digit growth in nominal GDP that matters in driving profits, investment, hiring and tax revenues,” he added. “It’s like having rivers of gold flowing into the country.”

(Editing by Neil Fullick)

3

Top Australian mining deals

Source: Thomson Reuters, *includes net debt

03/09/10

Entreprise value* – $ billion AnnouncedCompletedCompanies

Pending or completed since Jan 1, 2009

BHP-Rio Tinto iron ore joint venture

Newcrest Mining buys Lihir Gold

Goldcorp Inc to buy Andean Resources

Yanzhou Coal Mining takeover of Felix Resources

Adani Enterprises to buy Linc Energy’s coal project

Banpu bid for Centennial

Eldorado Gold Corp takeover of Sino Gold Mining

Minmetals buys most of OZ Minerals' assets

Newmont acquisition of Boddington Gold project

June 5, 2009

Aug 30, 2010

Sept 3, 2010

Dec 11, 2009

Aug 3, 2010

July 5, 2009

June 17, 2009

Dec 22, 2009

June 25, 2009

58.0

8.6

3.42

2.9

2.7

2.3

1.43

1.39

1.09

THE LUCKY COUNTRY OCTOBER 2010

AUSTRALIA POLICYMAKERS SEE INFLATION AS ENEMY NUMBER ONE OFFSHORE CONCERNS FOCUS ON HOUSEHOLD DEBT, HOUSING PRICES

RELIANCE ON RESOURCE EXPORTS UNDERPINNED BY RISE OF CHINA

4

BY WAYNE COLE SYDNEY, OCT 13

AUSTRALIA'S resource-driven good fortune has more than a few fault lines, from its reliance on

Chinese demand to its lofty levels of household debt and frothy house prices. But for the Reserve Bank of Australia (RBA), inflation is the top threat to the A$1.3 trillion ($1.28 trillion) economy.

As far back as February, RBA Deputy Governor Ric Battellino was warning that past resource booms had always ended with sharply rising inflation, often at a double-digit pace, and dodging this bullet would be the bank's most serious task.

The danger is that surging mining investment into an economy with only limited spare resources will fuel price pressures and require a painful tightening in monetary policy that ultimately brings the whole economy to its knees.

“One of the most tangible risks to the economic outlook that policymakers can control over the next few years is a surge in inflation and interest rates in the presence of high levels of household debt,” said Warren Hogan, chief economist at Australia and New Zealand Bank, echoing the view of most analysts in the country. Unemployment is already down at 5.1 percent having peaked at just 5.8 percent, far below early fears. Since the start of 2007, the Australian economy has generated 900,000 net new jobs. The United States lost 6.9 million jobs in the same period.

Finding skilled staff is already a headache. The latest Business Spectator Accenture survey of CEOs

found 64 percent rated it their biggest problem, ahead of climate change and tax.

A fall in unemployment under 5.0 percent seems inevitable, risking a repeat of what happened between 2006 and 2008. As the jobless rate dropped steadily to touch 4.0 percent, underlying inflation accelerated to a 17-year high of 4.7 percent, well above the RBA’s long term target of 2 to 3 percent.

The central bank reacted by jacking its cash rate up to 7.25 percent, the highest since 1994 and a painful burden to heavily indebted households. Ironically, it was the collapse of Lehman Brothers and the resulting crisis that averted a deeper downtrend by allowing the RBA to slash rates to just 3 percent. Having learned that lesson, the central bank is seeking to stay ahead of the game by lifting rates way before other rich nations. The cash rate is already back at 4.5 percent and a further hike to 4.75 percent seems likely by Christmas.

“They are acting well ahead of time in taking measures now to address what is likely to be a surge of investment in 2011,” said Sean Kean, an analyst who consults for Credit Suisse. “Think of it as a demand wave that the RBA knows is over the horizon and which will inevitably hit their sandy shores. Their objective is to ensure that the wave creates a surfable surface, not a tsunami.”

That is also one reason the RBA has not protested over the strength of the Australian dollar, since the resulting downward pressure on import prices should help restrain inflation.

INFLATION MORE DANGEROUS THAN DEBT TO AUSTRALIA

Australia terms of trade versus CPI

Sources: RBA, Thomson Reuters

13/10/10

Terms of Trade RBA trimmed mean CPI

30

60

90

120

150

20102005200019951990198519830

3

6

9

12

THE LUCKY COUNTRY OCTOBER 2010

5

CHINA FACTOR

Indeed, policymakers are actively counting on the exchange rate to help cope with the positive shock from trade, even if it hurts sectors like manufacturing and tourism.

And even here the advance of the middle class in China and India is changing things. The number of tourists from China had risen by 57 percent in the past year, more than making up for a fall in visitors from the United States and the United Kingdom.

The rise of China has perhaps been the biggest single boon for resource-rich Australia, sucking in exports and fuelling huge price increases for its major commoditieslike coal and iron ore.

Over 75 percent of Australia’s exports now go to Asia with China alone taking around 23 percent while India has come from nowhere to account for 8 percent.

That in turn means Australia is vulnerable to slowdowns in China and India which could crimp exports and prices. All the investment in new mines globally -- China is even building a giant copper mine in Afghanistan -- could eventually boost supply and curb prices. Yet in its global outlook out last week, the IMF argued that the urbanisation of over two billion people in China and India promises to make this boom longer-lasting, estimating base metals prices might only be half way through a 20-year super-cycle. THE GREAT DEBT DEBATE

For offshore investors and analysts it is household debt and house prices that seem to alarm the most.Household debt currently stands at 159 percent of annual disposable income, up from just 32 percent in 1990. Most of that is mortgage debt, which now amounts to A$1.13 trillion, with another A$140 bln of personal debt including credit cards.

The expansion of debt has fuelled a long rise in home prices and, by some measures, Australian property is now among the most expensive in the world. RBA officials say this is the always the hottest topic when they travel abroad. Ratings agency Fitch got so many enquiries that it is stress testing the banking system to judge how it would cope if house prices fell as much as 40 percent.

Hedge funds have been shorting bank shares in anticipation of just such a crash, though Fitch noted that its initial assessment was that banks had set

aside more than enough cash to cover even the worst-case scenario.

High-profile U.S. fund manager Jeremy Grantham recently grabbed headlines here by warning of an “unmistakable housing bubble” and a 40 percent drop in prices. He argued that Australian house prices were trading around 7.5 times family income, against a typical 3.5 times.

Indeed, the government’s measure of house prices did climb over 18 percent in the year to June, and is up 50 percent over the past five years.

Yet a more inclusive gauge of home prices comes from property consultant Rismark International which uses sales right across the country. It also adjusts prices for changing quality, a major factor given homes are 50 percent bigger than they were a couple of decades ago and increasingly come with all the designer extras.

By the RPData Rismark measure, median home prices are a much more reasonable 4.6 times household income.

John Wilson, the Australian head of bond fund PIMCO, weighed into the debate last week arguing in detail that fears of a bubble were misplaced.

Home ownership had been steady at around 70 percent since 1960, suggesting there had been no relaxation in lending standards, while home building had failed to match strong population growth leading to an under supply of new housing.

The sharp fall in house prices in the United States, the United Kingdom, Spain and Ireland is seen as a prelude to what may happen in Australia,” said Wilson. “However, the evidence points to more differences than similarities.” (Editing by Ed Davies & Kazunori Takada)

THE LUCKY COUNTRY OCTOBER 2010

Click for a narrated slideshow - Australia: the lucky country

6

BY MICHAEL SMITHSYDNEY, OCT 14

WHILE Australia basks in the glow of economic good health, the cracks in the country's

over-stretched infrastructure are becoming hard to ignore.

Traffic snarls on Sydney's roads, coal ships queuing into the horizon off Queensland's Dalrymple Bay port and clunky Internet connections are growing gripes in one of the few developed nations to avoid recession during the global financial crisis.

Soaring demand led by China and India for Australia's resources has exacerbated pressures on neglected infrastructure, which is now straining the foundations of the economy.Wheat exporters, miners and other firms cannot keep up with demand for extra port and rail capacity. Water, energy and communications infrastructure is also crying out for improvement.

Infrastructure Partnerships Australia, an industry body representing infrastructure firms, estimates meeting the shortfall could cost up to A$770 billion but says there is little sign governments will move swiftly to tackle the problem with fiscal prudence the order of the day.

"My real fear is that if we go into another era of tight expenditure on infrastructure we will fall behind, particularly with a higher dollar," Frank Gelber, chief economist at industry research group BIS Shrapnel, said.

"We now have a bonanza on minerals revenue and the economy is strong. We are in a good patch now, it won't always be like this. We need to actually make ourselves more cost-effective," he said.

Royal Bank of Scotland analysts estimate there is a backlog of more than A$100 billion in crucial federal government spending even though the country's fiscal position is stronger than many other OECD countries and interest rates are relatively low.

Capital spending has averaged 5 percent of gross domestic product over the past 50 years, but has slipped to 4.5 percent in the last 20 years, they noted.

RESTRICTING EXPORTS TO ASIA

A shortage of deepwater ports and rail infrastructure has been blamed for restricting export revenues from iron ore, coal and other commodities

coveted by China and other parts of Asia.

Some relief is on the way with some A$17 billion earmarked in Western Australia and A$24 billion nationally to build new ports to handle projected growth in exports.

Coal producers shipping through Newcastle port, the world's largest export coal terminal, have reportedly been asked to cut supplies as the port cannot cope with contracted volumes.

Queues at the port have risen to an average of 44 for the month to date, according to the Hunter Valley Coal Chain Coordinator (HVCCC), a coordinating body for those involved in exporting coal.

A A$3 billion iron-ore port project is slated for Western Australia but that project has been the subject of speculation it could be derailed if one of the partners pulls out.

Rail is also a problem for mining companies who need to transport commodities long distances from mine sites to ports. The Queensland state government is marketing the A$4-5 billion float of its QR National coal haulage operations, as investors and miners worry about how the network will cope with the demands for additional rail capacity.

Australia's biggest wheat harvest in nearly a decade threatens to strain the creaky rail network feeding that industry and delaying shipments for more than six months.

PORT, RAIL SHORTFALLS BLAMED FOR BOTTLENECKS

GOVERNMENT SAVINGS, COMMODITY DEMAND SURGE BLAMED

$758 BLN NEEDED TO MEET SHORTFALL - INDUSTRY

POLITICAL CLOUD HANGS OVER BROADBAND PROJECT

INFRASTRUCTURE CREAKS UNDER RESOURCE BOOM

Reuters/Tim Wimborne

THE LUCKY COUNTRY OCTOBER 2010

TRAFFIC GRIDLOCK

RBS says a practical way to gauge whether the infrastructure base has improved is to ask people whether their daily trip to work or school has improved in the last three years.

For most commuters, battling gridlock and failing public transport, the answer is a firm no. Particularly in Sydney where a string of proposed rail projects by the New South Wales state government have fallen through and become a national joke.

"For what is supposed to be one of the most cosmopolitan cities in the world and for a first world country, the transport system in Sydney is third world," said Chloe Wilson, whose daily commute from her inner city home to work involves hours of sluggish bus and train travel.

"There's no real investment in public transport to encourage anybody not to use their car so everyone is on the road or packed into transport when obviously a bit of investment would ease congestion for everyone," says Wilson, an inventory manager who rates Sydney's traffic as far worse than in her native London.

Although Australia covers an area roughly as big as the United States, its small population of 22 million is largely crammed into cities. Complicated by three layers of government - federal, state and local councils - spending priorities have largely focused on the vote-winning areas of health and education.

Former Labor Prime Minister Kevin Rudd, elected in 2001, promised to fix ports, roads and other bottlenecks and set up a new body called Infrastructure Australia. While hefty spending was earmarked in some sectors, particularly ports and telecommunications, the global financial crisis meant funding shortfalls for other projects.

His successor Julia Gillard, elected in August, has suggested putting the brakes on rapid population growth to ease the demands on straining infrastructure.

Telecommunications infrastructure was a major issue in Gillard's election campaign, with her promising to build a A$43 billion national broadband network. Australia's internet speeds rank a lowly 30th in the world. However, a question mark now hangs over the project with theconservative opposition threatening to dump the plan if Labor's minority government falls during ts three-year term or it wins the next election due by 2013.

(Edited by Micheal Perry and Ed Davies)

BUMPER WHEAT CROP TO STRAIN RAIL LINKS Australia's biggest wheat harvest in nearly a decade is threatening to strain a creaky rail network and delay grain shipments, just as buyers look to the country to plug global supply gaps caused by a Russian export ban.

Australia's eastern states are forecast to boost wheat production by 44 percent to 19.7 million tonnes in 2010/11. As harvesting starts this month, exporters' ability to exploit strong global prices will depend on how quickly they can move their wheat to ports from farms and silos -- and a bumper harvest could overwhelm rail and port facilities.

"We're facing a terrible situation as there is just not the rail capacity to get the grain to port," said Mark Hoskinson, chairman of the New South Wales Farmers Association's grain committee.

More than five million tonnes of wheat may still be waiting to be sold by the time the 2010/11 harvest gets underway a year from now, Hosinkson said."It will cost the industry billions of dollars and put our premium wheat market at peril," he said.

The problems have emerged over the past decade. Grain handlers have been reluctant to invest in rolling stock due to erratic crop sizes in the drought-prone eastern states, while cash-strapped state governments have been closing country branch rail lines. At the same time, industry deregulation has a led to a proliferation of grain handlers, reducing co-ordination but increasing demand for a system that can move large volumes quickly when prices are good.

Grain handlers are gearing up for a big crop. Both GrainCorp Ltd, eastern Australia's largest grain handler, and AWB Ltd, have added to their rail fleet this year. But industry analyst Malcolm Bartholomaeus noted the U.S. Department of Agriculture recently cut its estimate of Australia's exports to 16 million tonnes from 16.5 million, despite keeping its harvest forecast steady at 23 million tonnes.

"That suggests the USDA thinks the deregulated market hasn't matured enough to be able cope with the upper end of exports," Bartholomaeus said.

- Reporting by Bruce Hextall

Reuters/Mick Tsikas

THE LUCKY COUNTRY OCTOBER 2010

7

8

THE LUCKY COUNTRY OCTOBER 2010

BY MIRANDA MAXWELL MELBOURNE, Oct 18

AUSTRALIAN shares are about to take off after a mostly disappointing 2010, outperforming

other developed markets as the nation thrives on emerging-market demand for commodities and as metal prices reach record highs.

This month, mining stocks such as Fortescue Metals and Rio Tinto finally threw off the shackles of a new tax on miner profits to hit two-year highs, and many believe that this is just the start.

"The profit growth coming out of Australia is likely to be a lot better than the United States over the next three years," said Don Williams, chief investment officer at Platypus Asset Management.

"The fundamentals here are stronger. It's hard to see the earnings of the S&P companies growing faster than Australia in the next three years," he said.

Australia's economy is entering its 20th year without a recession, the price of exports such as gold and copper are surging, workers are enjoying near full employment and the Australian dollar is trading at 28-year highs.

Offshore talk of a housing bubble and dangerous levels of consumer debt has been largely dismissed at home as unplausible.

"The emerging markets will continue to be the area where you'll want to be investing. Of the developed markets, we benefit because of the commodity angle," said Lee Mickelburough, partner at Perennial Growth.

"If you look at the Australian economy, it's very well placed on a longer-term basis, given proximity to China, the commodity base, the banking system in pretty good condition, population growth. The stock market itself is attractively valued. The backdrop all looks pretty good." This year has been described by most as "disappointing."

Australia weathered the global financial crisis with surprising ease but the benchmark S&P/200 index has lost 4 percent so far this year, in contrast to its stellar 31 percent rally in 2009 which was a rebound from a 41 percent fall in 2008.

"It's been a little bit disappointing this year versus in particular the rest of the Asian region," said UBS chief strategist David Cassidy.

"Conditions in Australia are still pretty good but people think Australia got off pretty lightly in respect of the global financial crisis and think that Australia is still potentially at risk in terms of (household) gearing and those sorts of issues."

"We're still pretty positive on Australia. The momentum in the economy and commodities look pretty positive," said Cassidy.

A YEAR TO FORGET

In the year to end-September, Australia's share market underperformed all but two of 15 Asia-Pacific nations, according to MSCI performance indices. Three of Australia's main industries -- resources, energy and financials -- were among this year's worst performers.

"The market was in better shape right through the downturn. Consequently we haven't seemed to keep pace with some of the more depressed economies coming out of that downturn," said Tim Shroeders, portfolio manager at Pengana Capital.

STOCKS POSITIONED TO TAKE OFF, DOWN 4 PCT SO FAR THIS YEAR

DEMAND FOR RESOURCES TO KEEP EXPORTS, EMPLOYMENT HIGH

OFFSHORE INVESTORS FRET OVER INFLATED HOUSE PRICES

AUSTRALIA SHARES SET TO OUTPERFORM U.S., EUROPE

9

Even so, offshore investors will have made a nice return on Australian stocks on currency repatriation, with the main index up 23 percent in the third quarter when converted to U.S. dollars, compared with 6.5 percent in Australian dollar terms.Retailers, resource firms, media stocks and possibly telecoms are favoured for 2011, and a recent poll found pundits expect the index to rise around 8 percent to 5,000 by year-end.Stock valuations are unlikely to hold the market back: local shares fetch 12.66 times forecast earnings over the next 12 months, against multiples of 13.14 in Japan, 13.28 in the United States and 11.91 in Europe, according to Thomson Reuters I/B/E/S.But the question nagging offshore investors is whether Australia is dangerously laden with consumer debt, over-inflated house prices and banks at risk of mortgage borrowers defaulting.Some hedge funds are shorting Australian bank shares in anticipation of a crash in home prices, media reports say.Average house prices in major cities rose 18 percent in the year to June. Cramped terrace houses on city edges, built over a century ago for workers too poor for their own transport, now fetch around A$1 million in some suburbs.

Australia trade surplus

Sources: Australian Bureau of Statistics, Thomson Reuters

05/10/10AUD/$

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-4

-2

0

2

4 Trade balance - A$ billions

0.4

0.6

0.8

1.0

< < Click on the graphic for interactivity

THE LUCKY COUNTRY OCTOBER 2010

Australian central bankers say that when travelling overseas they are frequently quizzed about Australian house prices.

Offshore investors are suspicious that home values could be the economy's Achilles' heel, headed for the kind of downturn and economic aftermath seen in the United States and Britain.

Ratings agency Fitch has received so many enquiries about the sustainability of Australian residential property prices that it has decided to stress-test banks in case mortgage defaults rise and home prices fall substantially.

Still, Fitch does not expect a house-price crash crisis and many expect house prices to continue to grow, albeit at a slower pace. BIS Shrapnel said on Tuesday house prices in some Australian cities, including Sydney, would rise 20 percent over three years.

"Sure, it looks relatively expensive on the housing front, but you've got to really hone down and look at the structural drivers of that. Banks have generally been vigilant in their lending. Employment is growing, the population is growing, they're not releasing land and there's no overbuild of houses," said Akshay Chopra, analyst at Karara Capital.

(Editing by Mark Bendeich and Ed Davies)

10

NEW YORK, OCT 15

The Australian dollar rose above parity against its U.S. counterpart on Friday for the first time since becoming a freely-traded currency, extending a bull run that appears well-entrenched because of Australia's higher rates and robust, resource-driven growth.The Australian dollar rose as high as $1.0004, finally taking out the round-number, psychological level that analysts and market players have been eyeing for months.

Expectations that the Federal Reserve is on the verge of pumping more money into the U.S. economy in a process known as quantitative easing has also buoyed the Australian currency. Remarks from Fed Chairman Ben Bernanke on Friday gave it a final push above the $1 parity level.

The Aussie has been the strongest major currency since Australia skirted through the global financial crisis without falling into recession. In fact, its economy picked up steam, and the currency, known at home as the "little battler" for the pounding it took after it was freely floated in 1983, has surged 66 percent since touching a low of $0.6007 in October 2008.

The currency retreated after rising above parity and was last trading at $0.9920, and analysts warn trading will not be a one-way bet, with the latest data showing speculators already heavily long the Australian dollar. But traders said the pull-back was mostly driven by profit-taking, with support seen around $0.9908 and $0.9825, which is on a short-term trend line.

Charts suggest the Aussie could rise as high as $1.0236 in coming weeks, the 161.8 percent Fibonacci projection level of the currency's fall between November 2009 and May 2010.

REASON TO KEEP BUYING Unlike other countries griping about excessive currency strength against a sliding U.S. dollar, Australia's central bank has considered a stronger currency a natural outcome of the country's booming trade in natural resources and a tool for fighting inflation.

Australia's record trade boom could last for years, as the country sells most of the commodities needed by rapidly urbanizing China and India, including iron ore, coal, uranium, gas, wheat and cotton.

About 60 percent of Australia's sales abroad are commodity exports, and top trading partner, China, sucks in about a fifth of all total exports. Proximity

A$ HITS PARITY WITH US$

THE LUCKY COUNTRY OCTOBER 2010

to China and India has given Australia a leg up over resource-rich Canada, which exports primarily to the United States.

Surging demand from emerging Asia means Australia's export earnings from food, minerals and energy are expected to reach a record A$215 billion in the year to June 2011, a jump of 26 percent from the previous year.

Head-turning profits have in turn led to an investment binge. Analysts at JPMorgan estimate that total resource projects underway, planned or under consideration, amount to A$725 billion, or nearly 60 percent of Australia's annual gross domestic product.

That is fast-depleting spare capacity in the economy and has put the Reserve Bank of Australia (RBA) on inflation watch. And with low rates in developed countries driving capital into faster-growing emerging economies, there's little risk of the RBA intervening to hold the currency down.

The RBA has said rates need to rise from the present 4.5 percent, which is well above the Group of 7 rich nations average of 0.55 percent. That increases its appeal over lower-yielding currencies like the U.S. dollar.The Fed has already driven U.S. rates to near zero and is widely expected to pump more money into the economy in November, pushing the greenback down further. A falling U.S. dollar also drives up commodity prices, benefiting Australia.

Underscoring that, spreads between two- and 10-year Australian and U.S. yields, which historically are highly correlated to the Australian dollar, are near their widest in more than two years.

(Reporting by Reuters bureaus worldwide)

11

BY JAMES REGAN SYDNEY, OCT 7

AUSTRALIA is consulting miners on its proposed 30 percent tax on major coal and iron ore mines,

with a view to putting a final draft before parliament soon. But the tax faces many obstacles before it can become law, including threatened resistance from the nation’s three biggest iron ore and coal miners, Rio Tinto, BHP Billiton and Xstrata. Here are some questions and answers: WHO PAYS THE TAX AND WHEN DOES IT START?Prime Minister Julia Gillard wants to tax coal and iron ore profits of A$50 million a year or more, from 2012. The tax would raise A$10 billion in its first two years and help fund promises to cut company tax and boost retirement savings.

But Gillard’s minority government may need to tweak the tax to win support from independent and Green lawmakers who have the balance of power in parliament’s lower house. These pivotal MPs support the concept but not necessarily the detail of the tax.

The tax targets 320 iron ore and coal miners, with the three biggest -- BHP Billiton, Xstrata and Rio Tinto -- likely to account for 85 percent of total revenue from the tax. Others include Macarthur Coal, Centennial Coal, Fortescue Metals Group, Mount Gibson Iron and Atlas Iron. IS IT CLEAR HOW MUCH EACH COMPANY WILL PAY IN TAX? No. Analysts calculate the tax will see mining companies paying a total effective tax rate of between 35 and 44 percent. Rio’s effective tax rate over the past 10 years has been between 35 and 36 percent.

IS THERE A CHANCE THE TAX COULD BE BROADENED? The government has ruled this out. But to hold power, it relies on support from three independents and one Green lawmaker, who support the “principle” of the tax but who are likely to want some changes. Laws for the tax are also unlikely to pass through the upper house Senate until after July 1, 2011. IS IT POSSIBLE THE TAX WILL NEVER SEE THE LIGHT OF DAY? Yes, but only remotely. The conservative opposition parties oppose the new tax and any change of government due to the fragile numbers in parliament would see the tax scrapped. However, a change of government or early election remains

unlikely, as the independents could then lose their influence in parliament. WHAT COMES NEXT? The immediate problem for the government is to maintain its truce with the big three: BHP Billiton, Rio Tinto and Xstrata. In July, Canberra agreed to water down its original plan for a 40 percent mining tax in return for the trio dropping their threats to scrap new projects and divert investment offshore.

The big three are now accusing Canberra of jeopardising that truce by refusing to guarantee to refund all of the money they pay state governments in the form of royalties. Without such a guarantee, the trio say they could effectively be double-taxed.

A mining tax committee working out details of the tax aims to conclude consultations by the end of this year, so legislation can be drafted and introduced in parliament in 2011. The government has set an Oct. 28 deadline for submissions from mining companies on the tax. Once the legislation is before parliament, it could take several months to pass. First, it is likely to be shunted off to a House of Representatives committee. When it finally clears the lower house, it may be subject to a separate inquiry by the Senate. WHAT DO MINERS HOPE TO GET OUT OF THE CONSULTATIONS?

They are concerned the government could look to raise the tax rate and also impose restrictions on uranium and coal mining, which the Greens want banned and curtailed respectively. Miners will want assurances that this is not the case.

Magnetite iron-ore producers will seek tax exemptions, arguing they face much higher production costs than miners of high-grade hematite iron ore. Magnetite producers include Atlas, Gindalbie Metals, Citi Pacific Mining, Grange Resources, Centrex Metals, Royal Resources, Murchison, Onesteel and Emergent Resources.

Q+A: MINE TAX OBSTACLES

Reuters/Tim Wimborne

THE LUCKY COUNTRY OCTOBER 2010

12

BY JAMES REGAN SYDNEY, OCT 19

Australia is well positioned to dominate the world’s uranium industry, with half of all known deposits, but it could take a decade or more to hit its stride because of domestic political hurdles.

The ruling national and state Labor governments remain opposed to expansion and dominate at a national and state level, while growth prospects are limited to two of Australia’s six states and the Northern Territory.

As a result, Australian producers run the risk of missing out on an expected 20 percent jump in global consumption of uranium over the next five years, as emerging-market giants China and India alone build more than 185 new nuclear reactors.

“Uranium has taken a back seat in Australia to other investments like iron ore and gold, which have been getting most of the attention,” said Warwick Grigor, a sector analyst and chairman of BGF Equities in Sydney.

Despite its endowment in uranium, Australia holds barely a fifth of the global market, a legacy of the 1990s when political opposition and plunging prices combined to freeze exploration.

Even though the political climate for uranium mining has thawed, with the ruling Labor Party now no longer opposed to new uranium mines in states with existing mines, the industry remains a sensitive topic and still faces opposition from the influential Greens party.

In order to ramp up production, and take full advantage of its rich reserves, Australia still needs to persuade more state governments to lift bans on new uranium mines and must overcome a powerful environmental lobby determined to stymie the industry.

Only two of Australia’s seven states and territories allow new uranium mines, and although the political mood is swinging further toward expansion of the industry, the Greens party will ensure uranium remains a hot political issue and receives much more scrutiny than other commodities. CROWDED DRAWING BOARD

Prices are now going the uranium industry’s way. After falling as far as $7 a pound on spot markets in 2000, prices have rebounded -- spot uranium is at $48 -- as countries search for an alternative to greenhouse gas-producing power.

BHP Billiton, Cameco, Rio Tinto and others are taking steps to dig new mines and expand old ones in hopes of capturing a forecast 20 percent leap in yellowcake consumption by 2015. But to keep pace, they will need to fast-track protracted development plans still in their infancy.

Meanwhile, places like Kazakhstan and parts of Africa are also racing to dig new lodes -- Kazakhstan’s output alone is forecast to grow 17 percent this year, according to the Australian Bureau of Agricultural and Resource Economics.

“Australia has the potential to be a bigger supplier on the world stage,” said Eagle Mining Research analyst Keith Goode. “But they’re not the only ones in the game.”

The Australian Uranium Association has identified eight major uranium deposits ripe for exploiting in Western Australia state alone, which lifted a ban on uranium mining in 2008.

No uranium is mined yet in Western Australia, though BHP and Cameco are promising to exploit two massive lodes there.

BHP’s Yeelirrie deposit in northwest Australia is the country’s second-biggest unmined uranium deposit after Rio Tinto’s mothballed Jabiluka lode in the Northern Territory.

AUSTRALIA STRUGGLES TO HIT STRIDE IN URANIUM

AUSTRALIA MAY LOSE URANIUM COMPETITION TO NEW SUPPLIERS

HISTORICAL HURDLES, OPPOSITION KEEPS MINERS ON BACKFOOT

SEEN TAKING A DECADE TO CATCH UP; MAY MISS NEXT BOOM

THE LUCKY COUNTRY OCTOBER 2010

Reuters/ BHP Billiton

THE LUCKY COUNTRY OCTOBER 2010

AUSTRALIA'S PUSH TO MINE MORE URANIUM Australia is racing to keep pace with a projected 20 percent rise in global uranium consumption to feed a fast-growing nuclear power sector, but the nation has been slow to develop new mines due to political opposition.

Here are six facts about uranium mining in Australia: • Uranium mining is outlawed in all but

two of Australia's six states and in the Northern Territory.

• Australian uranium production is forecast to rise 35 percent in fiscal 2010/11, after declining 31 percent the previous year due to operational problems at BHP Billiton's Olympic Dam mine, according to the Australian Bureau of Agricultural and Resource Economics (ABARE).

• The Honeymoon uranium project in South Australia, owned 51 percent by Uranium One and 49 percent by Mitsui & Co., will be Australia's fourth uranium mine when it is commissioned later this year. The project is designed to yield 880,000 pounds of uranium a year for six years.

• BHP Billiton was the world's sixth largest producer of uranium in 2009 with 5.8 percent of the global market. Energy Resources Australia (68 percent-owned by Rio Tinto) was number eight with 2.7 percent.

• All of Australia's uranium is mined for export. The country relies almost entirely on coal-fired power generation. It has no nuclear power industry and no plans to start one because of entrenched public opposition to nuclear power.

• Australia's forecast for uranium production of 10,000 tonnes next year is expected to almost match that of Canada, while production in Kazakhstan will be double that, according to ABARE.

BHP wants to mine 90,000 tonnes of uranium from Yeelirrie over 30 years but has yet to break any ground.

BHP also owns the Olympic Dam mine in neighbouring South Australia, where it is planning a massive expansion to 19,000 tonnes a year from 4,000 tonnes now, but cannot say when that will proceed or how much it will cost.

Cameco has set a tentative start date sometime in 2015 for its Kintyre uranium mine, according to an invitation for public comment lodged with the Department of the Environment. Nearby, Energy and Minerals Australia owns the Mulga Rock deposit, holding enough uranium to light up Tokyo for 30 years.

“People are underestimating the (global) production shortfall coming in around 2013,” said Russel Bluck, managing director of explorer UraniumSA.

Driving the heady forecasts for global uranium needs is the expiration in 2013 of the megatons for megawatts program that converts Russian nuclear warheads into reactor fuel. When that occurs, secondary supply lines from Russian and U.S. uranium stocks, which currently supply 40 percent of world needs, may fall to as low as 5 percent, according to analysts.

Nuclear reactors use uranium as a fuel to boil water. The steam that is produced spins a turbine to make electricity.

(Editing by Michael Urquhart)

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Reuters/ Tim Wimboune

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