25/01/2012 - 10:14

2012 ... the year of the turnaround?

25/01/2012 - 10:14

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The past 12 months have been tough for almost anyone involved in the stock market; but for a particular crop of Perth-based miners, 2011 was truly a year to forget.

2012 ... the year of the turnaround?
MONEY ISSUE: Tim Netscher needs to deliver Gindalbie’s Karara project within the latest budget and schedule. Photo: Robert Garvey

The past 12 months have been tough for almost anyone involved in the stock market; but for a particular crop of Perth-based miners, 2011 was truly a year to forget.

FIVE Perth-based miners that were members of the S&P200 index last year watched their share prices more than halve, leaving the companies – many of which are now under new management – trying to work out how to win back the confidence of investors.

WA Business News took a look at five of the worst-performing Perth-based miners of 2011 and considers what needs to be done to turn them around.

Kagara Mining

There must have been times during the past 10 months that Kagara managing director Geoff Day wondered what he had got himself into.

It has been a steady stream of bad news at the group since Mr Day left Newcrest Mining to take the reins last March.

The sliding prices of zinc and copper have all but destroyed the company’s profitability, while questions over the longevity of Kagara’s rapidly maturing mines have also hurt the stock.

High operating costs and falling zinc prices meant that by December Kagara was losing US8 cents for every pound of zinc it produced.

The group did not win much love from investors after it launched a surprise $25 million capital raising last December. Earlier this month, Mr Day revealed Kagara would close its Mungana underground mine in Queensland for the wet season and reduce the company’s administration and corporate costs.

Kagara’s woes under Mr Day are not for want of direction.

He has been busy formulating and communicating a five-year plan he hopes will make Kagara “a dominant ASX-listed base metal producer within the next two to three years” that will be pulling in as much as $200 million a year in pre-tax profits by 2016.

Delivering on that ambitious rhetoric will be a major challenge, and he will need the long-term support and patience of his board.

The Admiral Bay zinc-lead-silver deposit in Western Australia could help Kagara towards that goal, but financing such a large and costly project won’t be easy if current market conditions prevail.

Gindalbie Metals

Like fellow Mid-West iron ore struggler Murchison Metals, much of Gindalbie’s recent history has been a story of cost blowouts and delays.

The pain really reached excruciating levels last March, when yet another budget blowout cost (then) managing director Garret Dixon his job.

When Gindalbie’s Karara magnetite project was announced back in 2007, the development was estimated to cost $1.65 billion. That figure has since been stretched out to $2.57 billion.

The key to winning back the love of investors for new managing director Tim Netscher is defying the seemingly ever-rising cost-environment in WA and delivering Karara within the latest budget and schedule.

Gindalbie recently reiterated its belief it can begin producing magnetite at Karara by September, and reach its initial 8 million tonne capacity by December.

Forecast cash costs are between $65-$68/t during stage one, which should generate healthy profits, and potential future expansions should bring down those costs even further.

Credit Suisse has a price target of $1.40 a share on Gindalbie, but acknowledges that another capex over-run and a resultant equity raising remain the key risks to the stock. 

Any hopes that 2012 would be a kinder year for Gindalbie were tempered in recent weeks when it was subjected to accusations (strongly denied) that it and its Chinese partner in the Karara iron ore project had deliberately favoured Chinese contractors.

Paladin Energy

Can Paladin defy the grim market that has faced uranium since the Fukushima nuclear disaster and bounce back? The company’s performance in January indicates the market may be convinced it can.

Paladin shares have already rallied 30 per cent in January, suggesting the negative sentiment that dogged the uranium sector in 2011 is becoming a distant memory.

The miner has been guilty of operational problems at its African uranium mines in the past year, but its share price woes are primarily related to the post-Fukushima downturn in the uranium market.

There appears to be an increasing number of investors who believe uranium prices will recover. Governments around the world were quick to announce planned nuclear shutdowns and the potential cancellation of planned reactors in the wake of Fukushima, but for all that rhetoric it remains very difficult and expensive to simply replace core power supplies with alternatives. 

The year ahead could be particularly interesting for Paladin managing director John Borshoff. He is the longest serving chief in charge of 2011’s worst performers (indeed, most came under new management last year) and another tough year could see investors forget the sterling job he has done in growing the company from scratch. 

Murchison Metals

Of all the companies on this list, Murchison probably had the most dramatic 2011.

It was a nightmarish year, with the iron ore company’s business model essentially falling apart and its chief executive and chairman being shown the door.

As markets continued to sour and iron ore prices cooled over 2011, the market became increasingly concerned over how Murchison could ever deliver the massive multi-billion dollar mine and infrastructure solution it was planning with its Japanese joint venture partner Mitsubishi.

Managing director Trevor Matthews and chairman Paul Kopejtka were tipped out in July after the Oakajee price tag blew out by 36 per cent to $5.94 billion. 

Mr Matthews’ successor, former AGL Energy chief Greg Martin, salvaged something out of the year when he struck a deal with Mitsubishi to sell all Murchison’s remaining interests in the Jack Hills iron ore project and Oakajee port and rail development for $375 million. 

The offer price is a sliver of the profits shareholders originally envisaged when Murchison was trading over $6 a share in 2007, but given the way the market has turned since then the deal is generally seen as a good outcome.

Once the deal goes through, Murchison will effectively be starting from scratch. Mr Martin needs to work out how much of the Mitsubishi cash will be given back to the group’s shareholders, and how much will be used to pursue new projects.

Given the pain sustained over the past few years, there may not be many shareholders with the stomach to fight on.

OM Holdings

Manganese prices keep falling, and so too does the share price of Northern Territory miner OM Holdings.

The price of the key steel ingredient has fallen to what would appear to be an unsustainably low level, so the challenge for OM is to cut back operating costs and survive until market conditions improve. 

In 2010, manganese sales to China were fetching around $US7.45 per dry metric tonne unit (the equivalent of 10 kilograms). That average fell to $US5.62 in 2011 and prices have continued to fall so far this year, with the current benchmark price sitting at $US4.75/dtmu.

Rubbing salt into OM’s wounds has been the strong Australian dollar, which has further eroded its profitability. 

OM is now aiming to get costs at its Bootu Creek mine down to $3.50-$3.80/dmtu while accessing a particularly high-grade portion of ore body and waiting for conditions to improve.  

The group believes it can sustain that for 24 months, but the company is expecting to make a loss this year of about $12 million.

It also needs to repair relations with major shareholder Consolidated Minerals, which last year blocked OM’s plans to list on the Hong Kong stock exchange.

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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