11/06/2013 - 13:51

Break for Gindalbie amid steel doubts

11/06/2013 - 13:51


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Investors reacted positively to news today that iron ore miner Gindalbie Metals had successfully restructured its finances, but will be reacting with less enthusiasm to the outlook for iron ore prices from Gindalbie’s biggest shareholder.

Investors reacted positively to news today that iron ore miner Gindalbie Metals had successfully restructured its finances, but will be reacting with less enthusiasm to the outlook for iron ore prices from Gindalbie’s biggest shareholder.

Within minutes of a fresh financing deal being announced, Gindalbie shares moved up by more than 20 per cent, which sounds impressive despite actually being just a two-cent rise on last week’s depressed closing price of 9.5c.

What investors liked was the certainty that comes from a fresh loan arrangement struck with China’s Anshan Steel, the company that already has a 35.9 per cent stake in Gindalbie and a 50 per cent stake in the Karara magnetite mine, a stake that might now rise to 52.16 per cent.

What investors will not like is the gloomy view of the Chinese steel industry, and by inference an equally gloomy view of iron ore prices from the chairman of Anshan, Zhang Xiaogang.

Not a well-known figure in Western Australia, and not even on the Gindalbie board, Mr Zhang is one of the most important players in the Chinese steel industry thanks to Anshan’s status as that country’s second biggest steel producer.

That position gives him a close-up view of what’s happening in steel and what’s happening in iron ore, because the two have one of the mining world’s most intimate relationships – you can’t have one without the other.

So when Mr Zhang provided a starkly realistic assessment of China’s steel industry in an interview late last week with London’s Financial Times newspaper, he was also providing a sobering commentary on Australian iron ore.

On Chinese steel, he said the heavy losses of the past few years would continue, with a return to strong profits not expected for another five to seven years.

“We have to prepare for a long-term struggle,” Mr Zhang said. “Some people will collapse during this war of attrition, if their cash flow dried up, or if they can’t make money at all.”

Despite that warning about low profits from steel, Mr Zhang is the man who signed off on the latest round of financing for Karara, effectively providing Gindalbie with what looks like a get-out-of-jail card given its tight finances and contractor allegations of bills not being paid – claims the company rejects.

The details of what Anshan will provide are complex, and subject to multiple layers of government approvals, but the essential message is that it will bring the cash to ensure that construction and commissioning of Karara is finalised.

In return, Anshan gets the right to take effective control of Karara and Gindalbie has a chance to emerge debt free, perhaps with a newfound interest in developing other iron ore projects, such as the far simpler Shine direct-shipping haematite mine.

If Anshan and Gindalbie can now finish building Karara and achieve commercial production, WA’s magnetite processing industry will have reached a turning point, though whether for better or worse remains to be seen, given Mr Zhang’s warning about profits and low prices.

The mothballing of the Southdown magnetite project by Grange Resources earlier this year was a reminder that processing low-grade iron ore is a business that might yield a high-grade finished product, but at a high cost.

The two WA magnetite mines that turn out an exportable product – the Sino Iron and Karara projects – have only reached this point after long construction delays and cost blows that range from alarming in the case of Karara to disastrous in the case of Sino.

What everyone, including the Australian Tax Office, now wants to know is whether either project is profitable or can ever be profitable.

Investors have an obvious interest in the question of profitability and will be watching carefully asset-value adjustments to reflect current market values, as Newcrest Mining did last week when it wrote off $6 billion.

Given low iron ore prices, and the prospect of them staying low for a long time, it’s easy to see companies like Gindalbie facing a similar accounting test.

As for the ATO, it will be watching closely, because while the Chinese steel producers behind Sino and Karara are doing it tough at home, they will be keen to pay the lowest possible price for raw materials.

Transfer pricing is the name of the game played when a profit in one jurisdiction is shifted to another.

In Africa, transfer pricing is estimated to cost that continent around $30 billion a year in lost tax revenue.

Australia hasn’t had a transfer pricing problem since the 1970s, when a number of foreign companies were hauled into court by the ATO for claiming losses in their Australian operations while making a profit elsewhere.

History might not be about to repeat, but the backroom boys at the ATO will be watching carefully, given the latest warnings about losses in Chinese steel making and the temptation to shift those losses to Australia.


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