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Mining boom? A billion times, yes!

If you wanted proof that the mining (investment) boom is continuing unabated, Fortescue Metals Group Limited (ASX: FMG) provided it in spades this morning, announcing a US$1 billion notes issue to fund an expansion in output, including new investment in its mining fleet to support that expansion.

Fortescue had previously announced plans to almost triple its production from 55 million tonnes per annum (mtpa) to 155mtpa, most recently confirming that target with the release of its half-yearly results in February.

Perhaps befitting the pure-play iron ore business that grew up on the back of China’s seemingly insatiable desire for our resources, Fortescue continues to go ‘all in’ on Chinese demand remaining, to use the catchphrase, ‘stronger for longer’ – eschewing the usual boom and bust cycle in favour of a longer term ‘super-boom’ caused by the structural growth in many of China’s major and regional cities.

The Chinese government has done an impressive job of delivering high single-digit and low double-digit growth rates over many years. The opacity of that country’s government statistics is the stuff of legend, and no-one outside the country (and very few inside China) can vouch for the voracity of the data and the degree to which the country is ‘over-investing’, well ahead of the natural growth curve. The latter, carried on for too long, would be likely to end badly.

An investment in Fortescue then is a bet on China – that the forces underpinning the current demand will remain in place for the foreseeable future.

The risks are that any softening in demand and investment could reduce the Chinese need for our resources, putting debt-laden companies at risk, and that an increase in global iron ore extraction will depress prices, thereby potentially dramatically lowering margins per tonne and making mines either uncompetitive or severely crimp the profits that the miners are able to eke out.

This is one I’ll be watching with interest… but from the sidelines.

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Scott Phillips is a Motley Fool investment analyst. You can follow him on Twitter @TMFGilla. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691).

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