01/08/2012 - 10:56

Dearth of deals puts pressure on at Diggers

01/08/2012 - 10:56

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Kalgoorlie’s annual resources extravaganza is set to be an interesting affair this time around.

Kalgoorlie’s annual resources extravaganza is set to be an interesting affair this time around.

‘DESPERATE & Distressed’ might be a better name for next week’s Diggers & Dealers forum in Kalgoorlie, with diggers desperate for fresh capital and bankers distressed by the lack of ‘deal-flow’ from the once-buoyant Australian mining industry.

Oddly, the tough conditions confronting miners and bankers will ensure a successful few days because both sides in this event where ‘money meets minerals’ need each other like never before.

Low metal prices, except for gold, are the core problem; but that is an issue that no-one at the three-day Kalgoorlie event can do anything about.

Low deal-flow is something that both sides can fix, which is probably why financiers, bankers, stockbrokers, accountants, lawyers and explorers will outnumber miners.

Mergers and acquisitions will be high on the agenda of both sides in their private talks, which are the real value of an event that remains the premier Australian mining conference despite its remote location.

But while talk of cost saving and value-creating takeovers will focus on the miners, it is the other side – the brokers and bankers – who might be in greater need of a cash fix.

Stockbroking, banking and other branches of the financial engineering business are in desperate trouble thanks largely to a significant slowdown in the level of investment activity of any sort.

Investors, large and small, have effectively gone on strike, as can be easily measured through the collapse of the initial public offering business, with 17 companies currently named as possible new floats by the ASX, but 10 of those already in mothballs. 

Cash is piling up in bank accounts rather than being invested in the stock market because the owners of money are deeply worried about the direction of the global economy, and unhappy about the high-taxing (and lax spending) policies of the Australian government.

While distressed diggers at D&D will mourn their collapsed share prices and shortage of capital to fund exploration or mine development, they might be surprised to discover that the desperate dealers have an identical problem.

For proof of the poor state of the money and mining side of the D&D equation, consider the share price moves of speakers on the first day of the conference. Hot Chili, for example, is a highly rated copper explorer sitting on a world-class discovery in Chile. Its share price has fallen by 43 per cent from its 74-cent high to its most recent price of 42 cents.

On the money side of the conference there are broking firms travelling just as badly, or worse.

The net profit of Euroz, an ASX-listed brokerage with its head office in Perth, slumped by 59 per cent to $10.4 million in the year ending June 30, leading to a 55.5 per cent fall in the annual dividend from 18 cents to 8 cents a share.

On the market, Euroz shares are down 39.7 per cent from their 12-month peak of $1.66 to $1, roughly the same fall suffered by Hot Chili.

Bell Financial, another listed broker, has performed even more poorly with a share price slide of 48.7 per cent from a high of 78 cents to recent trades at 40 cents thanks to a 64.6 per cent profit fall last year, and with its latest half year (to June 30) scheduled to be released this week.

Investors uncertain about when and how to get back into the junior end of the mining market might find ideas flowing from the D&D event, but the fact that both sides of the conference are ‘travelling rough’ should serve as a warning about the risks associated with deals done out of desperation.

This year, perhaps more than ever, brokers and miners are under pressure at the same time because of poor cash flows, and both will have an interest in marketing their ideas to anyone with a bit of spare cash.

The problem is that the downturn through which we’re passing probably has a year or more to run. Europe needs fixing. China is looking better, just. The US is sluggish, and the Australian government is hopelessly in need of additional tax to plug the holes in its budget.

It’s for those reasons that the best opportunities to make money from mining will be in a burst of creative M&A activity, which could well emerge from next week’s D&D conference; but be wary of deals promoted by desperate brokers and distressed miners.

A glimmer of hope

DESPITE the politically induced gloom there is some good news left in the resources sector, as bankers from HSBC reminded clients in a research paper titled ‘Reports of the mining boom’s death are greatly exaggerated’, a point likely to be reinforced over the next three weeks with the release of profit reports by BHP Billiton and Rio Tinto.

The bank’s thesis is that the boom is a three-stage affair. Phase one, soaring commodity prices, is over. But now we move into phases two and three, continued high levels of construction, and higher export volumes.

Rio Tinto will be the first test of this ‘boom continuing’ theory when it reports on August 8, the last day of Diggers & Dealers. A lower profit is expected, but not a devastatingly lower profit, which might justify the company’s 37 per cent share price fall.

BHP Billiton follows on August 28 with its full-year result, which is forecast to be around 17 per cent down on last year, a relatively modest decline when measured against the pervading gloom, during which the stock has been marked down by 27 per cent.

Elders’ future?

ALSO on the question of premature death notices ... it will be interesting to see if an emerging plan to revive the once-great farm-services business, Elders, can work. Front-runner in a game of restructuring a complex share structure, and selling unwanted (non-farm) assets such as a car parts business, is the small Tasmania farm supplier, Ruralco, a business that looks awfully like Elders of 30 years ago, before it became a plaything of assorted entrepreneurs.

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“Freedom is the right to tell people what they do not want to hear.” George Orwell.


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