In November 2006, Tinkler, a 32-year old former electrician, bought the rights to a relatively unknown coal deposit in Northwestern Australia (Queensland). 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.

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Here’s what former Goldman Sachs VP Kenneth Courtis told the Australian Financial 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.

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.

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.

Good investing,

Dan Denning

P.S. I’ve just completed a full report on the best opportunities in Australian mining stocks. I guarantee you won’t find in-depth research on these companies in the U.S., which makes them an outstanding, undiscovered way to make money in the resource bull market. Click here to read more about this report.Source: Why Australia Could Become the Next Stock Mania

Also, welcome back 6,000. Won’t you stay awhile this time? There were quite a few new 52-week highs set last week, including BHP Billiton, Coal and Allied, Oil Search, Fleix Resources, Macarthur Coal, Australian Worldwide Exploration, Western Areas, and Steamships Trading Company.

Do you notice a trend there?

The All Ordinaries finished last week at 6,006. That’s a 16% rally from the March 18th lowly low of 5,163. It erases most of the 20% year-to-date deficit. But it’s still down 12% from last year’s all-time high at 6,835 (on November 1st) and 6.46% for the year.

Does the index even matter? If you own a share portfolio that passively tracks the performance of the All Ords, we suppose it does. But you have to wonder if the All Ords are doomed to indirection, like Siamese twins trying to run in opposite directions at the same time. For investors, maybe the smartest thing to do is cut them apart and let them go their own way.

By “them” we mean the resource, energy, and basic material stocks in the one camp, and the consumer discretionary, listed property trusts, and financial stocks in the other camp. The energy sector is up on the year by nearly 20%. Materials are up about 14%. Meanwhile, consumer discretionary stocks are down by 26%, financials down by 17.4%, and listed property trusts (now called A-REITS) down 19.4%. Industrials are down 17.3% as well.

You don’t need to be DaVinci to decode this performance do you? Resource and energy producers are up with higher oil and bulk commodity prices (and probably some hot foreign money). Financials are down as investors wonder how banks will grow earnings in 2008. The consumer discretionary sector is the market shrieking in horror at the effect of all the interest rate rises on the Aussie consumer (not to mention food and fuel inflation).

The two sectors with the most questions are the A-REITS and industrials. Bottom-fishing contrarians would be attracted by the dismal performance of each. But let’s not forget the two big issues that hover over the property market: valuations and leverage. If property prices slump or simply grow less fast, this hurts the A-REITs. And leverage? You’ve seen what happens when it works in reverse.

The industrials—more than any other sector—show us the effects of rising energy costs in the real economy. These companies are unable to pass on the rising costs to customers. Margins are crunched. A fall in the oil price that lasted for a quarter or so might lead to a nice recovery in these stocks—or at least a tradeable move.

“Hey Gabriel?”

“Oui?”

“If you had to make one long and one short trade on ASX sectors today, what would they be?”

“May I have a moment to look at the charts?”

“Bien sur.”

After a few moments, he replied.

“ LONG on the Industrials sector. The Index has lost 32% between November and March, found a good support and rebounded on the previous low that was posted before the strong rise between August and November 2007. Here’s the chart:

“The decrease of 32% occurred in a bearish channel. The price action cleared this channel on the upside recently, which argues for a further momentum up. The 14-day RSI is well-oriented, therefore more upside to come before a potential overbought situation. 5,650 pts then 6,000 pts the next targets (23.6% and 38.2% retracement levels).

And short?

“The Utilities sector. The Index has rebounded 23% in 2 months, now the momentum is slowing and a few indicators argue for a shift in the price action in the near-term. Look at the chart.”