–One quick addition to our point about Exxon yesterday. Oil companies have to invest in upstream production or their stocks will be punished. An oil company’s reserves are, in effect, its assets and future cash flow.

–If you don’t replace current production with new reserves (something that’s getting increasingly hard and expensive to do), you’re essentially depleting the inventory of product you can sell to customers. The stock market, being a forward-looking mechanism, sees companies that don’t invest in future production and translates that into declining revenues and lower valuations today.

–Many state-owned national oil companies-most notably PEMEX in Mexico-have failed to invest adequately in upstream production. They pumped the oil, generated the cash, and the government redistributed the proceeds in ways that governments do. But a private sector enterprise would never take its future resource base for granted the way a politician is happy to do. Hugo Chavez.

–If Australia wants to develop its OCS oil and gas industry, it’s going to cost a lot of money. But the profits could be enormous. And by that we mean, really big.

–Is bauxite the next iron ore? Or is zircon the next bauxite? We just wrapped up our investigation into Australia’s mineral sands industry. A long-line of prospective new producers are lining up. But most of them have yet to really define their resource base, much less put out a realistic valuation to shareholders based on the market price for zircon, ilmenite, and rutile (the two main feedstocks of titanium dioxide pigment).

–But even Rio Tinto has noticed zircon prices are rising. Zircon is what we’d call an “element of urbanisation.” It’s used to glaze ceramics and glass. Demand is driven by the big demographic trends in China and India, where people are moving off the farm and into the city.

–Assuming the world doesn’t starve itself by overproducing people and underproducing food, demand for zircon, ilmenite, and rutile is going to grow. That means more producers will be needed in Australia, which already has the world’s largest economically defined resource of mineral sands and is the world’s leading producer.

–The hot regions for new production and exploration are the Murray Basin and the Eucla Basin. After careful investigation, though, we reckon the North Perth Basin is where the real action will be. After all, that’s where all the action has been in the last 40 years. There are some familiar patterns emerging where new companies are accumulating tenements and drilling on properties right next door to know mineral sands mines. It’s a pretty clever strategy. Will it work? We’ll keep you posted.

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