Down-Under Energy Opportunities: Ivor Ries

Ivor  Ries Most investors may not have Australian resource companies on their radar screens, but that doesn’t mean that there aren’t some great opportunities worth pursuing Down Under. In this exclusive interview with The Energy Report, Ivor Ries, utilities and energy analyst at E.L. & C. Baillieu Stockbroking Ltd., one of Australia’s oldest securities firms, describes the challenges faced by energy-related companies in his country and how they are taking advantage of the opportunities available both at home and in the U.S., Canada and South America.

The Energy Report: Your firm has been in the investment business for over 120 years. Can you give us an overview of the energy markets and the challenges and opportunities that energy companies in Australia face?

Ivor Ries: Australia has historically been the quarry and energy source to emerging Asian economies. As a result, our economy is inextricably linked with the progress of China, Korea, Japan, India and the other Southeast Asian economies. Initially, we were mostly a supplier of minerals, but in recent years, the liquefied natural gas (LNG) markets have become a very large part of our economy. We have two very large LNG projects in production and a third smaller one in Darwin. Another five LNG projects are now under construction, which will more than triple Australia’s LNG output over the next five or six years.

The LNG boom has its pros and cons. The investment spending is a huge boost to our economy, but it also has caused a huge shortage of contractors and manpower. The price of labor has gone through the roof in any business related to oil and gas. An unskilled laborer working on an LNG project in Australia is probably paid somewhere between two and four times as much as he or she would be elsewhere. Australia has very tight restrictions on labor coming in. At the moment, the industry is forcing the government to change that. The government recently announced it is going to reduce the visa requirements for American and Canadian oil and gas workers, so they can help plug that gap. That would be a huge relief for the industry. We have a very heavy-handed set of regulations here, and there has been a lot of media hysteria surrounding fracking, particularly in the coal-seam gas areas and a very strong campaign to have fracking stopped. Anyone running coal-seam gas or unconventional gas here has to run through a very stringent and time-consuming environmental approvals process, which probably adds two to three years to getting a project off the ground. When it comes to the cost of getting things done, everything takes longer and is more expensive than expected. That’s frustrating.

TER: What’s the breakdown of Australia’s energy production versus its consumption of oil, gas, coal and other energy sources?

IR: The domestic market in Australia is overwhelmingly coal driven. Australia is the world’s largest seaborne coal exporter, and our domestic power industry runs about 80–85% off coal and to a smaller extent off hydroelectric power and gas. Cheap coal gives us very low-cost baseload power across the entire economy. A population of only 23 million (M) people is just not enough to create a significant market for gas, and that has resulted in a terrible oversupply. Until we started shipping LNG, gas prices were incredibly low. We’re just now starting to see the connection between the domestic gas price and export prices. Typically, for the last five years, the price for gas on the east coast of Australia was about $3.50 per million British thermal units (MMBtu). Now we’re starting to see some longer contracts being signed at about $7–8/MMBtu.

TER: Do LNG exports offer a big potential opportunity?

IR: Yes. In Australia, unlike the U.S., the mineral resources belong to the government. So the people who own the land do not own the minerals underneath. In the States you have the overriding royalty system where the landowner typically gets a percentage of the production. Here in Australia, the state government gets a royalty that is typically about 10%. The net cost of producing coal-seam and conventional gas is very low. There is a good network of pipelines on the east coast for moving the gas around where cash production costs, particularly from the better coal-seam gas fields, are typically less than $1/MMBtu. That’s very cheap. With an LNG plant, the price is now around $12–13/MMBtu. Even after the pipeline charges and the LNG plant operating costs, that is quite a big margin. In the recent years, we’ve had quite a lot of consolidation with global names buying up the smaller coal-seam gas players to increase their reserves and have a bigger stake in LNG.

TER: Are most Australian energy companies geographically diversified with operations in other countries?

IR: Our bigger companies here tend to be multinationals, like BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK), Rio Tinto (RIO:NYSE; RIO:ASX) and Woodside Petroleum Ltd. (WPL:ASX). The Australian market is so small that to grow beyond a certain size, you have to become multinational in some way. The next tier down is a huge drop in terms of size. Our biggest pure domestic gas play is probably Origin Energy Ltd. (ORG:ASX). It has about a $16 billion (B) market cap.

TER: About how many energy-related public companies are there in Australia?

IR: There are a lot. Our market is a bit like Calgary in that we have a lot of really small exploration companies here. There are probably more than 250 listed energy companies on the Australian Stock Exchange (ASX).

TER: You have a fairly broad range of companies in your coverage list in terms of stage of development, type of business and the price of the stock. How do you decide what companies you want to cover?

IR: Many companies are working on a lot of small things. Our chief criteria is the company has to be involved in pursuing one or more core projects where the central resource is at least 100 million barrels oil equivalent (Mboe). Otherwise, there’s no point. Companies chasing smaller projects tend to burn through shareholders’ capital and then ask for more. We figure if you chase a 100MMbbl target and you derisk it, you may not actually produce it, but someone will come and pay you some real money for it. So that’s the first criterion. The other criterion is the quality of the management. Once we feel comfortable in that area as well, the company goes onto our coverage list. But as you can see, there are not many.

TER: What are your favorite companies right now?

IR: The ones that stand out to me at the moment are companies like Karoon Gas Australia Ltd. (KAR:ASX), which is a midsize explorer/developer with an LNG project in Australia and a huge exploration project ahead in Brazil. Molopo Energy Ltd. (MPO:ASX) and Red Fork Enegry Ltd. (RFE:ASX) are essentially American companies that happen to be listed on the ASX. Molopo has acreage in the Bakken in Saskatchewan, Canada and a project in the Wolfcamp play in the Permian Basin in Texas. It has about 25,000 net acres in Texas. We’re very excited about that. Red Fork has about 75,000 net acres in the Mississippi limestone play in Oklahoma. It has been getting some good results from its early wells there. We think these stocks are all very undervalued relative to the size and quality of the land positions they have. The next 12–18 months for all three will be exciting because they have a lot of wells going in and production will be ramping up. If they get a reasonable run of drilling success, their share prices will be significantly higher than they are now.

Molopo’s Wolfcamp drilling areas are surrounded by a lot of very big players getting some really good results. These include EOG Resources Inc. (EOG:NYSE), El Paso Pipeline Partners L.P. (EPB:NYSE), Approach Resources Inc. (AREX:NASDAQ), ConocoPhillips (COP:NYSE), Pioneer Southwest Energy Partners L.P. (PSE:NYSE) and Devon Energy Corp. (DVN:NYSE). On some of their better wells, those guys are getting over 1.8 Mbpd from long laterals. Molopo has drilled three short lateral wells so far, and all have flowed oil. It is about to crank up production and put in somewhere between 8 and 10 wells there by year-end. Long, lateral wells will target much higher flow rates than achieved to date. As the company derisks the project, the market will really appreciate that asset.

TER: What about Red Fork?

IR: Red Fork is up in the Mississippi limestone area in Oklahoma. That’s a real hotspot, and the last time I looked, there were 240 drill rigs running in the area. Red Fork is run by some very experienced oil guys out of Tulsa. It’s had a couple wells on pump so far and has been getting some nice oil flows, and is about to crank that up. Red Fork has a very big land position. It will be getting a big following from the States as its production cranks up, going to somewhere between 10–12 wells this year. Toward the end of the year, I wouldn’t be surprised if its production was getting close to 2 Mbpd.

TER: Does that hold up or does it taper off relatively quickly?

IR: Because it has so much acreage, it will just keep drilling. I think it will eventually have more than 300 well locations that it can drill there. It will certainly be able to grow its production by just steadily increasing the footprint there. Its neighbors are getting 30-day initial production rates around 350–550 bpd on pretty low-risk wells. If it can string together a whole bunch of those, we think it will then be seen as a serious company. At the moment, Australians see Red Fork as purely speculative and they haven’t really bought the story yet.

I should talk about Karoon Gas Australia Ltd. for American investors. Over the years, it has looked long and hard at whether it should actually be listed in America simply because the Australian market is probably struggling to value it. It has three projects, including a huge gas condensate field discovery in a joint venture with ConocoPhillips in the Browse basin off the northern coast of West Australia. That’s the Poseidon fields, which have estimates ranging anywhere between 3 trillion cubic feet (Tcf) and 15 Tcf gas, with a P50 estimate of around 7 Tcf gas, and a reasonably high condensate cut in that. It’s drilling another five wells there with Conoco this year to get it to the point where it can have bankable reserves and then start going out and looking for customers. It’s not really an exploration project anymore, but more of an appraisal development-type thing. It will require very big capital and a contract offtake for at least 4 million tons (Mt) LNG before that project will stand up. We’re talking an $18–20B capex to get that project up and going. Karoon is the junior partner in that. It originally scoped it, found it and then took it to the market, and Conoco farmed into it. Since then, it’s just working it up to the point where it can start signing up customers. That’s its number-one project.

The other two projects are in Brazil and Peru. In Brazil, it won five blocks in a government tender two years ago. It has spent a huge amount of money and time on 3D seismic and developed a large number of 200–300 MMbbl targets there, which it will start drilling in the second half of this year. This is a very high-impact exploration program. Before it does that, Karoon is almost certainly going to farm it out to a larger player because it lacks the people and manpower to carry out a project of that size alone. Degolyer & McNaughton have done some work on this and estimate around about 900 MMbbl potential in those five Karoon blocks. So we’re expecting a strong interest in it.

TER: So that amounts to about $90B in the ground, correct?

IR: Yes. These are huge targets in not terribly deep, but not shallow water, either. These are $80–100M wells, and Karoon will be looking for someone to make a commitment to at least three wells and fund its back costs. Anyone coming through probably has to have a check in their pocket for $500M. That farm-out process is now almost complete with the partner announcement expected around mid-May, and drilling starting in the second half of the year. It already has a drill ship contracted so whoever buys into it is getting a fully worked-up project and it’s going to get instant excitement as soon as it buys.

In Peru, Karoon has some onshore and offshore leases with potential for up to 700 Mboe. Again, it’s looking for farm-in partners for that. The approval will probably come out toward the end of the year. This is a company that is chasing really big, high-impact projects. The stock is generally not held by Australian institutions. Most of the non-aligned shareholders are American pension and hedge funds and high net worth individuals.

TER: So it is definitely working in elephant country.

IR: That’s right. With these sorts of companies, the only way you can value them is by applying a probability or a risk factor to the chance of success. Poseidon is definitely a project. We just don’t know how big or how valuable it is. You have to apply some probability to the rest of the stuff. We end up with a valuation range of between $7.04 and $17.35/share. It is about $6 at the moment. Our midpoint value is $12.20. These are risked valuations with pretty heavy risk factors so if one of these things in Brazil, in particular, turns into a discovery, then obviously that valuation would increase very dramatically. It’s a high-risk, high-reward kind of stock, not for the faint-hearted.

TER: Are there any other companies you’d like to talk about or mention?

IR: In big-cap land, Origin Energy has been a great performer over the years. Its share price is really suffering at the moment because the market is so concerned about cost blowouts on LNG projects. It’s building a $20B LNG project with Conoco up in Queensland. Because other project costs are blowing out, the market is very wary, and its stock has really been sold off over the last 12 months. We think it’s really an excellent company, with about $2.5B/year cash flow from its domestic operations. It’s a really great business that’s been one of the best performers in the Australian market for as long as it’s been listed. If anyone wanted to play the big and liquid way, certainly Origin would be the standout.

TER: How would you summarize the big picture on energy investment opportunities in Australia?

IR: We think there is certainly a lot of value in Australia. Our market is somewhat thin and illiquid, so we don’t have the depth of analysis. We have a lot of companies often holding U.S. assets, which actually trade at a huge discount to what they would do in their home market. If you’re selective, you can find some real bargains here.

TER: Thanks again for joining us today

IR: Thank you.

Ivor Ries is a senior analyst and director of industrial research at E.L. & C. Baillieu Ltd., a long established stockbroking firm with offices in Melbourne, Sydney, Perth, Bendigo and Newcastle. Ries joined the world of stockbroking in 2001 after a 22-year career in media, included reporting and commentary roles with The Age, Business Review Weekly and The Australian Financial Review. Ries joined E.L. & C. Baillieu in July 2001. The firm specializes in research and corporate advice for medium-sized industrial and resource companies and counts many of the country’s major institutional investors as clients. Ries’ areas of specialization are utilities, oil and gas and online media and e-commerce. A native of Queensland, Australia, Ries lives in Melbourne with his wife and daughters. He is a Brisbane Lions supporter.

Stock Market Repeating Itself: Michael Ballanger

Michael Ballanger The resource markets have weathered some death defying ups and downs lately. But Michael Ballanger, senior investment advisor with Toronto-based Union Securities, is looking for a renewed period of growth in the TSX Venture Composite Index. Is it too soon to see such a heady rebound? In this exclusive interview with The Gold Report, Ballanger makes his case for history repeating itself.

The Gold Report: The TSX Venture Composite Index reached a bottom of around 1,300 in October after it more than tripled from 2009 to early 2011. You believe the index is poised for another two-year gain. It’s an interesting theory. Why should we believe that history will more or less repeat itself so quickly?
Michael Ballanger: It’s all about mathematics. However, underneath that forecast lurks a much deeper premise. I’m a member of a very small minority that believes we’re now in the continuation of a massive bull market in resources. The TSX Venture Exchange has had one sharp correction since 2008. It’s now resuming its uptrend.

I’m also looking for a resurgence of the “manic phase” of markets. During the last manic phase in 1978–1981, the Vancouver Stock Exchange quadrupled in an 18-month period as gold went into its final ascendancy.

TGR: What were some characteristics of the market in the ’70s that are comparable to what’s happening now?

MB: Psychologically there are a lot of similarities to 1978 because investors have been behaving like scared rabbits. Fund managers were throwing things under the bus in October that I couldn’t believe. It was mass liquidation for no reason. It was a generational buying opportunity.

TGR: There seems to be a lot more global instability now. Are you expecting “black swan” events in the next few years that could create further instability?

MB: I’m not looking for Armageddon at all. I think we are going to have a really good two-year run. There will be bumps along the way as the world financial system irons out its issues. Nothing cures debt levels better than inflation and growth, however.

TGR: This does seem to be a very friendly environment for commodity prices and resource companies. But aren’t we just one negative macroeconomic data point away from being right back where we were?

MB: The problem with the media is that it continues to use European and North American data as its guidepost. Developing nations are creating demand for resources like I’ve never seen before. The population is growing and resources are being used at an increasing rate despite Europe, Japan and the U.S. struggling.

A lot of these populations approach gold and silver differently than the West does. They’re not looking to trade it. It is part of their legacy that they pass down to generations. That’s where the demand for the precious metals will come from. It’s a shift in demand.

TGR: Most of the junior mining companies listed on the TSX Venture Exchange are gold companies. If you believe the TSX Venture Index is going up, you have to believe the gold price will head higher, too. What’s your trading range for gold in 2012?

MB: Industrial metals, like zinc, copper and nickel, are going to outperform the precious metals in 2012. Just as the base metals got hammered violently in ‘08, the same occurred in the latter half of ‘11. The resultant rebound should show a greater percentage move based on the global recovery.

Silver could outperform gold in 2012 due largely to the supply-and-demand situation. However, gold and silver could both take out their 2011 highs this year. Gold at $1,525/ounce (oz) and silver at $25/oz will be seen as the correction lows in this multi-decade bull market. Those are two levels I wouldn’t want to see violated.

TGR: What’s the upside for gold and silver prices?

MB: Gold and silver could both take out their 2011 highs, but I don’t like picking numbers. It just gets meaningless. It is an absolute breeding ground for gold and silver bugs. Not that I’m one of them, but it is a very favorable environment for the metals. If you’re on the right side of the trend, you make money in the junior mining stocks.

TGR: You created a 2012 list of your top value plays. Could you tell our readers about some of those names?

MB: We emphasized Yukon stocks last spring and our two picks, Kaminak Gold Corp. (KAM:TSX.V) and ATAC Resources Ltd. (ATC:TSX.V), hit record highs in July. The bright spot for this summer was the relatively superb performance of Tinka Resources Ltd. (TK:TSX.V; TLD:FSE; TKRFF:OTCPK), which closed 2011 above the July 2011 financing crisis of $0.35.

Another favorite that we’ve been involved with for four years and participated in multiple financings for is Explor Resources Inc. (EXS:TSX.V). It reported an NI 43-101-compliant 800,000 oz resource recently. It has been one of our top five companies since 2007.

Kaminak is still our darling of the Yukon. There’s a lot of wannabes running around, but Kaminak is superbly run by Rob Carpenter.

Our junior penny stock in the Yukon is Stakeholder Gold Corp. (SRC:TSX.V). It is sandwiched between Kaminak and Kinross Gold Corp. (K:TSX.V; KGC:NYSE) in the Ballarat Creek area, which is located on Thistle Mountain.

TGR: Tinka’s Colquipucro silver-lead-zinc project in Peru looks promising. What do you know about what’s happening there?

MB: I must confess, Tinka has been a nice surprise. It was orphaned after the 2008 meltdown despite having drilled off an NI 43-101-compliant silver resource of 20.3 million ounces (Moz). It has two drills working about 1 kilometer apart at its deposit and at a new discovery, Ayawilca.

It’s all open-pittable. Just move the top of the rock off, throw it on a crusher and you’re away to the races. It’s an engineer’s dream. The first game plan is to get that resource up to north of 30 Moz. Now the blue sky becomes what is happening at depth underneath this oxide cap.

Just to the south is Cerro de Pasco, which is owned by Peruvian mining company Volcan Compania Minera SAA. It’s the fourth biggest mine in Peru, one of the largest in South America and it is a massive epithermal. What’s interesting about Cerro de Pasco is that the mineral rhodochrosite is prevalent there. Rhodochrosite isn’t prevalent except in an epithermal. Tinka recently indicated that it has rhodochrosite at Ayawilca. There isn’t enough drilling into it yet to confirm it’s an epithermal, but Ayawilca’s blue sky just lights up like a Christmas tree when you look at it.

TGR: How does its valuation compare with other companies at similar stages?

MB: It’s too early to value Ayawilca, but you can value Tinka’s silver. Tinka’s got 20.3 Moz Inferred, but I have confidence it’s going to move to 30 Moz.

With a rising silver price and the investment public warming to juniors again, it could reach a market cap of around $60–75 million (M) up from $38M today. That’s based on the known. The unknown is where you accelerate your return. Ayawilca is the blue sky. If Mother Nature and Lady Luck bless us then we’re going to be looking at the Ayawilca zone adding a lot more upside in the future.

TGR: Kaminak just recently optioned some potash properties in Michigan. Do you have any idea why?

MB: Shareholder value. Rob Carpenter knows that the ultimate rate of return for Kaminak is going to be the Coffee gold project in the Yukon. Kaminak has other assets that aren’t being paid much attention. The best way to get shareholder value out of those is to let somebody else go to work on them while maintaining focus on a flagship property like Coffee. Let other people bear the risk and costs of exploring those properties.

TGR: Kaminak and ATAC shares have started to climb higher this year. ATAC reported a nice intersection in early December of 44 meters at about 4.5 grams/ton gold at its Osiris zone. Is ATAC going to return to its 2011 high?

MB: When a stock like ATAC, which moved to $10/share in July, is thrown irreverently under a bus, I have to ask why. I still can’t figure that out. It wasn’t the retail public. It had to be quasi-professional investors. ATAC has an excellent chance to get back to the midrange between where it bottomed around $2/share and its high of $10/share last year.

I think Kaminak is a takeover waiting to happen. The way that the Coffee property is being developed, there could be 6–8 Moz there. It has only drilled off 15% of the land package.

TGR: Stakeholder Gold is a micro-cap company with a market cap of just a few million dollars. Are they going to be drilling anything soon?

MB: Stakeholder had originally planned to drill the Ballarat property in July, but through some unfortunate developments it wasn’t able to. I’ve looked at all the soil and trenching analysis. Various creeks flow down the sides of the mountain into the Yukon River. Where theses creeks flow is where the Klondike Gold Rush was. The source of that mineralization was in the upper elevation where Stakeholder’s Ballarat property is. Stakeholder has excellent soils. It has good trenching results. It has two anomalies there. That property’s got to get drilled. It’s got every bit as much of what I call “geochem evidence” as Kaminak did before it drilled the Coffee property.

Yes, Stakeholder is a micro cap. But some Yukon juniors had $35M market caps when they didn’t have any discoveries two years ago. I view Stakeholder as a bottom-feeding expedition now that it has dropped down to $5M. Stakeholder has got an excellent land package. It’s compelling. That’s why we like it.

TGR: Some market pundits feel that the junior exploration and mining sector has been hurt over the past decade as it moves from being a retail investor sector to an institutional investor sector.

A share price would jump on news and the retail investor would cash out and watch the stock come back down and buy back in. The retail investor would make money two or three times while supporting the stock price. Now the institutional investors get in, make their money and get out and stay out. What are your thoughts on that?

MB: If a management group executes its plan, the company gets rewarded whether it has an institutional, retail or a combination shareholder base. Take Kaminak as an example. Despite the recent correction, Kaminak has been a very successful company.

People have asked me, “Why aren’t the juniors attracting the same kind of dominance they had in the ’90s and the late ’70s?” There are other reasons than the institutional involvement, such as the advent of exchange traded funds (ETFs). I’m going to get into hot water, but I absolutely detest ETFs. They’re a financial product developed by and for the express benefit of the financial industry as opposed to the investor. I don’t believe in them, I don’t agree with them and I don’t use them.

The problem with ETFs is they create this risk on/risk off attitude that the junior mining sector is a basket and it doesn’t matter what Tinka’s got or Explor’s got or Kaminak’s got. That’s what happened in the latter part of 2011. Investors said, “Oh, we better get out! We’ll sell everything.” They didn’t care that Kaminak’s last three drill holes were spectacular. It didn’t matter. They sell their ETF associated with junior mining companies and all the companies that are covered by that ETF get blown off.

TGR: Do you have any parting thoughts for us on this sector?

MB: In 2009, I predicted higher gold and silver prices and a booming mania-driven junior mining sector. We got the move in the precious metals. We have yet to experience anything close to the mania that we saw in 1978–1980. The TSX Venture Exchange traded to a new low on Oct. 4 relative to the gold price. It was absurd by any measure. Companies are taking the risks to find new deposits. That’s precisely where the big upside is moving forward into 2012.

TGR: Thanks, Michael.

Michael Ballanger currently serves as an investment advisor at Union Securities, Ltd. He joined the investment industry in 1977 with McLeod Young Weir Ltd. His substantial background in financing junior resource companies is further informed by his 30 years of experience as a junior mining and exploration specialist. Ballanger earned a Bachelor of Science in finance and a Bachelor of Arts in marketing from Saint Louis University.

Brazil, Russia, India and China: Forces to Be Reckoned With

In a 2001 research paper entitled “Dreaming with BRICs: the Path to 2050,” investment bank Goldman Sachs introduced the notion that Brazil, Russia, India and China could surge to become four of the largest economies in the world. Since then, they’ve been racking up growth figures that make it seem intensely possible.

There’s no political or economic union between these four nations; they’re simply four of the largest of the world’s emerging markets. Brazil and Russia are major commodity exporters; the former specializing in soybeans, coffee and iron ore and the latter in energy products. China and India, on the other hand, boast tons of cheap labor and claim increasing shares of manufacturing and services outsourcing. However, there is a symbiosis between the four of them, with industrial China and India demanding commodity building blocks from Brazil and Russia, raising their individual gross domestic product (GDP) levels through mutual trade.

The BRIC

Brazil is the slowest growing of the four BRICs with a GDP rate of merely 5.4% in 2007 and 25 consecutive quarters of growth. In the past four years the Brazilian real appreciated 83% against the U.S. dollar, the best performance of all the world’s most actively traded currencies, and per capita GDP has risen to $9,700.

Russian GDP growth in 2007 reached 8.1% after nine years of expansion. Partly due to the largest number of higher-education graduates in Europe and partly due to a flat income tax of 13%, per capita GDP is a respectable $14,700. The federal budget has been in surplus since 2001; it has paid down Soviet-era international debt by 31% and amassed the third largest foreign currency reserves in the world (behind China and Japan).

India grew at a 9.2% clip in 2007 but has the farthest to go of the BRICs, with per capita GDP at $2,700 and over 27% of their massive population below the poverty line. Agriculture remains a major part of the economy and 60% of employment.

China, the largest and still growing the fastest, is slowing its 2007 11.4% GDP growth down to something nearer 10.0% for 2008 as the global economy and demand for manufactured products slows. (Keep in mind they’ve been racing at that pace for the past 30 years.) To prevent becoming simply a cheap labor center, China is now pushing the education of scientists and engineers, hoping to attract R&D funds as well. Per capita GDP has risen steadily and has reached $5,300, although 10% of the population remains below poverty.

The 2001 Goldman Sachs report predicted the BRICs would produce 10% of the world’s goods by 2010. In August 2008 they’re already producing 15%.

In recent years, these nations have grown so fast that their rising demand pushed commodity prices through the roof, with skyrocketing crude oil, iron ore, coal and copper prices directly attributable to China alone. Their demand for technology is equally high. In 2005 the BRICs spent US$65 billion for IT products; by 2009, that’s forecast to reach $110 billion or 8% of the global market—the same as Japan. For companies looking for export markets to develop, those are mouthwatering numbers.

Problems at Hand

Each of the BRICs has problems in their economic machinery. Brazil, for example, still maintains import tariffs to protect domestic producers. Their inflation remains high at 6.3% per year, and the central bank has raised interest rates to a jaw-dropping 13.0% in their attempt to cool domestic demand. Russia has one of the worst organized crime problems in the world, and the industrial sector still hasn’t recovered from decades of Soviet neglect, while India has basic infrastructure problems such as poor roads and unreliable power supplies. China’s problems include lax environmental regulations leading to 20 of the 30 most heavily polluted cities in the world and a serious image problem after global recalls of unsafe products.

Economic futurism is fraught with peril. So many assumptions must be made—questions not only economic but also demographic, governmental, environmental and industrial, among others—that it can be difficult enough selecting an international stock for investment, much less predicting the developmental growth path of four separate nations. Many variables must come together to make the Goldman Sachs BRIC dream a reality, some of which, such as policies supportive of growth, are up to the BRICs themselves, while others, such as natural disasters, are not. Whether or not they achieve the goal set for them, this emerging economic force will play an increasingly strong role on the global stage.