Dollar woes starting to bite

ALL eyes in Australia have been glued to the sporting arena for the past week with cricket and rugby holding centre-stage – which means that most people have missed a momentous turn of events in the homeland of one of the great rugby teams, events that contain a worrying message for Australian business.

On October 9, almost in unison, Bernard Swanepoel and Gary Ralfe issued blunt warnings about their business interests in South Africa, saying that unless that country’s currency, the rand, stopped rising in value, they will be forced to start sacking workers, and possibly closing mines.

Neither man is a lightweight. Swanepoel runs Harmony Gold, South Africa’s number three goldmining house. Ralfe runs De Beers, the global diamond cartel.

Unions, naturally, said both men were bluffing.

Briefcase knows they’re not because in 2002 the rand rose by 26 per cent against the US. dollar, and this year it is up another 40 per cent.

Even the famous Blind Freddie’s dog can tell you that if your costs are in rand, and you’re selling in US dollars (which is how gold and diamonds are sold) then you have moved about 66 per cent further behind the eight ball in less than two years.

Fast forward to Oz, the land of cricket, rugby, beer, parties and a mining boom.

Over here, no-one talks about boring stuff like rising dollars and falling revenue. Ah, well at least they don’t yet, but they will soon if the trend continues because Australia is not far behind South Africa.

Since bottoming around the US50 cent mark a few years ago the Aussie dollar has clawed its way back to US69 cents, a rise of 38 per cent – and that increase is causing pain.

Platinum Australia could not develop its Panton Sill mine partly because of the rising dollar (and the falling palladium price) and Methanex has walked away from a methanol project in the north west. These are signs that the pips are squeaking.

What happens if the Australian dollar keeps rising or, more to the point, if the US keeps pushing down the value of its currency to aid its exporters. That is when we will have mining leaders echoing Ralfe’s words when he said De Beers was conducting “a critical review” of its costs because the currency posed “a serious and immediate challenge” to the company. Rising metal prices are dulling the pain of currency fluctuations. But, imagine how much better it could have been if the currency had not moved higher.

Nickel at $US11,000 a tonne today is worth $A15,942 based on the US69 cent exchange rate. On the earlier exchange rate of, say, US50 cents, nickel would be worth $A22,000 a tonne.

At US55 cents it would still be worth $A20,000, and even at the rate of a few months, around US62 cents it was worth $A17,741.

To put all of that into more “human” terms consider the 1,907 tonnes of nickel produced by Independence Gold in the September quarter. At the US62 cents exchange rate and the $US11,000 a tonne price it was worth $A33.8 million.  At the same nickel price but at US69 cents exchange rate the metal is worth $30.4 million – $3.4 million forfeited, or more than $1 million a month, a very painful number for a small business.

It would be unkind to calculate the lost revenue if the Australian dollar was still at US50 cents but just for the light amusement (and please don’t tell the chief executive, Chris Bonwick) September’s production would have generated $A42 million – taking the theoretical loss on the currency appreciation to $A11.6 million, almost $A1 million a week.

The boom in nickel and gold stocks, which has made the stock market so interesting in recent weeks, will look a lot different when speculation gives way to serious number crunching and some of the silly nickel prospects being talked about – many being nothing more than recycled flotsam from booms past – have the blowtorches of currency, quality and orebody depth applied to their fundamentals.

SPEAKING of speculation, it has been amusing to see a few measurements applied to the rising tide of new floats being prepared for the investing public.

According to one list more than 40 floats are under starter’s orders, with at least 10 of them falling into the category of small resource offerings.

For Briefcase, which was embarrassed by the wholesale defection of explorers to the artificial dot.com world a few years back, it is great to see so many new companies destined for the slightly less artificial world of mineral exploration.

Names on the way, with no comment on quality, include Westcoast Mining, Innamincka Petroleum, Paradigm Gold, South Boulder Mines, Arafura Resources and the delightfully named Prosperity Metals. Good luck to them all.

ON the reverse of floating, it is one of the modern miracles of the market that Anaconda Nickel stays on the stock exchange at all with its whopping 6.9 billion shares on issue. Management says this will soon be fixed with a one-for-15 share swap, which should produce a more respectable 460 million shares

The number of shares, however, is not the issue. The real worry is that 88 per cent of the company appears to be in two pairs of hands – 46 per cent with Swiss commodities trader Glencore, and 42 per cent with US vulture fund MatlinPatterson.

Surely that arrangement will not last much longer with someone cleaning up what a geologist would call “an anomalous situation”.