09/01/2007 - 22:00

Cost blow-out to temper profit push

09/01/2007 - 22:00

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The past year was a boom time for many businesses and investors, yet ironically it was characterised as much by failed deals and lost opportunities as it was by successful transactions.

Cost blow-out to temper profit push

Last year will be remembered as a period during which Western Australia enjoyed a sustained resources boom, with commodity prices, property values and the stock market all hitting new highs.

Many businesses have reaped big profits from the boom, particularly established businesses that have been able to exploit the current conditions.

Many investors have also enjoyed the boom, with mid-cap mining companies rising on the back of high commodity prices and new floats, particularly in the uranium sector, soaring on blue sky potential.

But it has not all been plain sailing, especially for businesses trying to develop new projects.

Labour shortages, soaring costs and patchy stock market conditions have put a dampener on the economic and commercial outlook.

“The big crunch in 2006 and for 2007 is the cost blow-out,” Gresham Advisory partner Jennifer Seabrook said.

“It is taking margins away from a lot of businesses.”

Three key examples highlight the current challenges: the $940 million float of heavy equipment company Emeco Holdings Ltd went ahead only after the offer price was discounted; Coogee Resources Ltd was forced to pull its $380 million float after failing to gain institutional investor support; and Indian company Oswal Group, which backed the $630 million Burrup Fertilisers project, has chosen Papua New Guinea as the site for its next ammonia plant.

Against this backdrop, which companies deserve a pat on the back for executing astute business deals during 2006?

One of the most significant developments occurred late in the year when the federal government granted WA grain handler CBH Group Ltd a 500,000-tonne wheat export permit.

This was the first real crack in AWB Ltd’s monopoly and followed a sustained effort by CBH, led by chairman Tony Critch and chief executive Imre Mencshelyi, to move directly into the wheat export market.

Agriculture Minister Peter McGauran received 46 applications for a wheat export permit but granted just two.

Apart from Wheat Australia, which was set up to service the Iraq market, CBH was the only group to be granted a permit.

It will be able to export wheat to its part-owned flour mills in Indonesia and will pay a premium price to farmers.

While many farmers will lobby for a return to the single-desk arrangement in future years, it will be difficult for the federal government to turn back the clock.

The iron ore sector holds enormous growth potential but outside of the industry heavyweights – BHP Billiton Ltd and Rio Tinto Ltd – only two companies made tangible progress in 2006.

Fortescue Metals Group Ltd defied the sceptics by securing $3.2 billion in equity and debt funding for its massive Pilbara iron ore and infrastructure project.

FMG paid a high price for the funds, which included the largest high yield debt issue completed in the Asia Pacific region.

Nonetheless, the company and its chief executive, Andrew Forrest, have surprised the many critics who thought the project would never get off the ground.

Freehills partner Justin Mannolini believes the ability of FMG to raise such a large amount of money reflects the same trends that have underpinned the highly leveraged private equity deals in the media and airline sectors.

“There is a lot of money floating around and a fairly benign credit environment,” Mr Mannolini said.

“They must be banking on the commodity boom being sustained.”

Mid-West iron ore miner Mt Gibson Iron Ltd also made substantial progress in 2006, selling its high-cost magnetite project and completing the acquisition of Aztec Resources, which is due to start production at its Koolan Island mine shortly.

Mt Gibson will have two producing iron ore mines generating real profits and a prudent growth path, in contrast to the high-cost and high-risk growth plans of most other companies in the sector.

A third iron ore company that warrants special mention is Clive Palmer’s Mineralogy Ltd, which was paid $285 million in cash when it sold the rights to some of its Pilbara deposits to China’s CITIC Pacific.

Like the iron ore sector, uranium stocks have attracted a lot of speculative attention.

There has been a flurry of uranium floats in the past year but only one local company is poised to generate real profits.

Paladin Resources Ltd has astutely exploited the current boom conditions, with commissioning of its Langer Heinrich mine in Namibia under way, $US250 million in funding already in place for its next project in Malawi, and the acquisition of explorer Summit Resources adding growth opportunities in Australia.

Listed stock broking firm Euroz – like many lawyers, accountants, engineers and other professional service providers – had a great year.

A notable milestone was its role as lead manager and corporate adviser to Adelaide company Beach Petroleum Ltd on its $360 million capital raising and acquisition of Delhi Petroleum.

This was a big step-up for Euroz, being much larger than the capital raisings normally managed out of Perth.

“In the past, a lot of corporates in WA thought WA brokers couldn’t handle the big transactions,” Euroz executive chairman Peter Diamond said. “Beach has shown that is not the case.”

With a growing capital base, Mr Diamond believes Euroz will be able to manage even bigger capital raisings in future.

Alinta has successfully executed a series of bold growth initiatives in recent years and in 2006 made its biggest play, an audacious bid for much larger energy company, AGL.

The target responded with a counter-offer for Alinta and the two companies became embroiled in a protracted and heated stand-off.

This was resolved by a complex asset swap, which was widely considered to be a less-than-perfect outcome. Nonetheless, the deal was a very significant development that continued Alinta’s rapid national expansion.

The kudos for this deal was partly offset by Alinta’s decision to buy back its infrastructure spin-off, just one year after it was floated.

In the property sector, industry pundits have long been calling for the construction of a major CBD office tower to accommodate the expected growth in demand.

Developers such as Multiplex and Hawaiian have been trying in vain to secure anchor tenants for new projects, but they were beaten to the punch by Luke Saraceni’s Saracen Properties, which secured BankWest as the anchor tenant for its Raine Square redevelopment.

The board of Tethyan Copper and its corporate advisers, Gresham and RBC, deserve plaudits for winning a great takeover price for shareholders early last year.

Hong Kong investor Crosby Capital partners recognised Tethyan as an undervalued stock, with the market failing to appreciate the potential of its copper project in Pakistan.

Crosby opened the bidding with an offer of 64 cents per share, well above the prevailing share price of about 48 cents per share.

Tethyan rejected the offer, reviewed its strategy and attracted a rival offer from Chilean company Antofagasta.

The end result of the bidding war was that Antofagasta paid $1.40 per share to Tethyan stockholders, more than double Crosby’s original offer.

Biofuels was briefly one of the hottest sectors on the ASX, but most biofuels stocks ended the year in the red and several companies were forced to scrap planned capital raisings.

Despite the gloom surrounding the sector, Natural Fuel managed to complete its $83 million float and is ranked as the largest biofuels stock on the ASX.

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