Sydney crash batters stocks but Bain & Co. undeterred

If you think North American markets have been battered, take a look at the Sydney Stock Exchange where share values have depreciated by almost 50% or about $100 billion since the Oct 19 market crash.

Much like Canadian stock exchanges, Sydney has reflected the internationalization of equity markets. As an example, the market closure in Hong Kong during the peak of the crisis precipitated a massive sell-off on Sydney when it reopened; this simply compounded the earlier crash.

But Australia is still attractive to Canadian mining companies and the reverse is also true, The Northern Miner learned firsthand as part of a visit to Black Swan Gold Mines’ Gabanintha project (N.M., Nov 16/87) in Western Australia.

For a merchant banker’s perspective on the obvious synergies between our two mining industries, we talked to David Hughes, a principal in the investment firm, Bain & Co., which has its head office in Sydney.

Hughes said his company is looking at several ways to fund deals for Australian and Canadian companies, claiming he likes Canada “because it’s a big resource country with good synergy to Australia.” He also said the currency risk in Canada is considerably less than in Australia where its dollar has reflected the nation’s dependence on export markets.

Among the companies Bain is interested in are Vancouver-based Esperanza Explorations and Welcome North Mines, both headed up by John Brock. Hughes likes Esperanza’s 100% interest in the Tillicum Mountain project in the Nelson area of B.C. where a production decision could be finalized next year. He also had some good things to day about Welcome North, a shareholder in Esperanza with broad exposure to a variety of metals through its various property holdings.

But Hughes doesn’t like the restrictions put on foreign investors purchasing stock in Canadian companies, particularly the one- year hold on private placements. “In Australia, we can trade the next day,” he emphasized. But the regulatory climate is even more stringent in the United States, he added, so Canada is still relatively attractive.

According to Hughes, Bain & Co. is the largest investment banker in Australia and is roughly the equivalent of Solomon Brothers in New York where Bain also has an office. Overseas branches are located in Hong Kong, Tokyo and London, England, but there are none in Canada at present. At the time of our visit, Bain had still not fully assessed the impact of the market collapse on the company. But Hughes pointed out that the brokerage end of its business generally represented 30-40% of profits and he noted the company had a “big financing capacity” which they want to utilize despite the recent downturn. Losses minimized

While conceding the company may have been hurt by the recent market crash, Mr Hughes argued that losses would be minimized because it was one of the “biggest dealers in Australian bonds.” How much did the private partnership earn last year? Try $40 million(A) pre-tax and until the market downturn things were looking as good or better this year.

With a capital base of at least $70 million, Hughes said that Bain was the only truly independent brokerage firm in the country. “We are not owned by a bank and we offer total confidentiality in our deals,” he said, admitting they have no plans to go public either. “What we have to offer is a distribution base in Australia and an understanding of Australian and Canadian tax laws,” he stated.

Hughes said that Bain could finance larger companies like Mount Isa Mines but it prefers smaller emerging companies similar to Black Swan which he believes “will be a big company in 10 years.” Bain has taken a large position in Black Swan (the company got in at about 95 cents ) and has done the last three private placements. He has a great respect for its management and the company’s prospects for increased gold production in Australia and North America.

He said that Black Swan has a large Australian shareholder base and will be listed on the Sydney Stock Exchange in the near future. Hughes argued that the Vancouver Stock Exchange was “too thin” and he said Black Swan would probably list on Toronto as well.