Chinese Investment A Lifeline For Australian Miners

Perth, Western Australia– Consider the Australian mining scene of six months ago — a chronic shortage of professional and skilled workers, high wages, headhunters wallowing in fees, long waiting lists for drilling rigs, and a line-up of IPOs being listed at the rate of at least two a week.

Add to that scenario companies unable to get a square inch of office space in the mining hub of West Perth, despite landlords demanding rents incomprehensible a year before. The disappointed or more frugal moved into offices farther away from Perth.

Today there is a different scene, altogether: Jobs are being lost at mines around Australia daily as operators either cut production or mothball their operations; “For Lease” signs are appearing in West Perth; headhunters have been beheaded; and drilling companies are idling rigs. Anyone wanting to launch an exploration IPO has more chance of catching a racehorse goanna — a large outback lizard noted for its speed — than a compliant stockbroker.

The blight has seen many of the companies floated in the past two years pull up the drawbridge, sack a large number of their staff and, if they have less than A$1 million in the bank, ponder how they will last into mid-2009.

Some are earnestly talking mergers, but unless they have advanced projects or a decent cash balance, the negotiators know there will be poor market acceptance.

The mighty have also fallen. Caught in the vortex through too much debt is OZ Minerals (OZL-A, OZMLF-O)– Australia’s third-biggest miner by market capitalization. To stay afloat, OZ is now looking to sell its Martabe gold project in Indonesia and joint venture its Prominent Hill copper-gold mine in South Australia.

Rio Tinto’s (RTP-N, RIO-L) shedding of 14,000 workers globally may have a big impact on the Australian head office in Melbourne, iron ore operations in Western Australia and coal on the eastern seaboard. Almost certainly, the moves will take in the usual victims of an Australian downturn: the exploration geologist and the publicist.

However, amid the gloom, prominent Perth resource financing and broking identity Charles Fear believes the market nearing mid-December was beginning to turn for the better in both commodity and share-trading terms.

Fear, executive chairman of Argonaut Capital, has been through four booms and busts. An odd but consistent trend he has found with these highs and lows has been the arrival in Perth of international banking and stockbroking firms as the climate was on the downdip, with the bust immediately ahead, to prompt them to then either close offices or recede to their usual Australian base of Sydney, or back home.

This poor timing, Fear said, may repeat itself whenever the next recovery arrives.

He said there had been some necessary cleansing with metal prices coming off record highs and a scarcity of professional and skilled people having put enormous costs on mining and exploration companies.

Projects elevated through stellar metal prices are now either under review or closed, including privately held Consolidated Minerals’ nickel operations at Kambalda, where neighbouring operations are struggling but generally faring better thanks to better ore grades and more ample reserves.

Fear said cashed-up companies are in a strong position today to look at advanced-project mergers and acquisitions on their own terms. While cash-strapped juniors are in a parlous condition, companies that have advanced development projects but not enough cash in the bank are facing nervous bankers that don’t even trust each other.

Does this sound like Canada today? Not quite, I presume, for Australia was supposed to have this great new firewall against recession called China, whose astronomic boom and insatiable demand for ore and metals was going to be an unrelenting driver for at least the next decade, with Australia as a key focus.

But China began pulling in its horns three months ago, slowing down its intake from Australia, and hitting the big producers and the smaller newcomers alike.

The aspiring new iron ore miners from the mid-north and Pilbara of Western Australia were walloped hard. One established producer, Mount Gibson Iron (MGX-A, MTGRF-O) revealed new agreements on ore sales to Chinese companies APAC Resources and Shougang Concord International that drastically lowered prices. APAC and Shougang also took up bigger placements in Mount Gibson to inject much-needed capital of A$162.5 million to continue operating the Tallering Peak mine in the mid-north and Koolan Island off the Kimberleys coast, though at a reduced 2008-09 target of 5 million tonnes per year from the original 7.2 million tonnes.

One junior caught in the vortex was Matilda Minerals (MAL-A), which mines zircon-rich mineral sands in the Tiwi Islands off Darwin in the Northern Territory. Its single major shipment was on the water when refused and Matilda went into administration.

Big new iron ore miner Fortescue Metals Group (FMG-A, FSUMF-O) halted its planned second- stage expansion at its operations in the Pilbara, but the new order on iron ore sales is expected to have an element of the Chinese getting even.

Three years ago, giants BHP Billiton (BHP-N) and Rio Tinto, along with Brazil’s Vale (RIO-N) succeeded in gaining astronomic annual increases of more than 80% for iron ore sales right when China was launching its grand expansion.

Three years ago, anyone that suggested these hikes would eventually bite the big miners and would be a catalyst for the Chinese to invest in Australian juniors wanting to get into production was scorned.

Analysts are now saying that Chinese mills and metal houses will play hardball with BHP Billiton, Rio Tinto and Vale, and that ore sales for these three will be reduced and at lower levels than the early 2008 benchmark prices.

While Australian miners have joined the other global producers in production cutbacks, closing lower-grade mines or mine sections and mothballing some processing capacity, there are signs of strength.

Well-known gold bug and veteran stockbroker Hugh Wallace-Smith, who is based in Geelong, Victoria, with Bell Potter Securities, says that Australian gold miners have probably never had a better Australian dollar-denominated gold price.

Those who are unhedged and have mid-tier and lower operating costs are making a killing, said Wallace-Smith, citing Dominion Mining (DOM-A, DMNOF-O) and Beaconsfield Gold (BCD-A) as two that should flourish in 2009.

Both are mid-sized gold miners with healthy underground grades — Dominion at the Challenger mine in South Australia and Beaconsfield at Beaconsfield in Tasmania, where only a few years ago, two miners were rescued after being trapped underground for several days.

In December, these two mines would have received between A$1,200-1,280 per oz. for their unhedged gold.

(Newmont Mining’s [NMC-T, NEM-n] relatively small, but grade-driven open-pit and underground operations at Waihi averaged a return of NZ$1,402 per oz. in October.)

The impact of the recession has seen the Australian dollar nosedive against the U. S. greenback in the past four months, dropping from US95¢ to below US65¢.

Those with cash will be in seventh heaven in 2009: deals will come to them at bargain-basement prices; drill rigs are plentiful and at sharply reduced prices; and good staff is available at negotiable prices.

What will happen in Australia in 2009 is hard to predict, but there will be more Asian, Japanese and Chinese money in the country, and assets that are newly available won’t come just from the juniors and the projects in blueprint, but from the fire sales of majors like Rio Tinto and OZ Minerals.

One example of this new order was the injection by China’s Shenzhen Zhongjin Lingnan Nonfemet Co. of A$45.4 million into Broken Hill lead-zinc-silver miner Perilya (PEM-A, PYMLF-O)
to provide the now-marginal miner a guaranteed future and a new 50.1% shareholder.

Perilya was one of the darlings of early 2008 whose profits disappeared in the latter half of the year with plummeting zinc and lead prices.

Perilya’s chairman Patrick O’Connor said more recently that virtually nobody saw the extent of the commodity price and financing collapses.