22/04/2010 - 00:00

Early pullout costs Champion de Crespigny

22/04/2010 - 00:00

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Iluka Resources’ recent turnaround may be frustrating for Robert Champion de Crespigny.

It’s been a while since the name of Robert Champion de Crespigny was mentioned in Australian business circles. That might be about to change, though not for the happiest of reasons.

The problem, which only ill-mannered scribblers such as Bystander will raise, is the heavy loss incurred by Mr Champion de Crespigny and a group of rich mates in a poorly-timed stock market raid on Australia’s biggest titanium minerals and zircon miner, Iluka Resources.

And the only reason such a tacky subject is being raised now is that Iluka’s share price has risen strongly over the past two months, and is now comfortably above the exit price achieved by the Kolsen Syndicate which Mr Champion de Crespigny headed, before retiring to a country estate outside the British university city of Oxford, accepting roles such as a recent appointment to the advisory board of Barclays Bank.

Moving in such esteemed circles means that the last thing Mr Champion de Crespigny wants reminding of is what might have been had the Kolsen crew hung around a bit longer to land the prize they saw in Iluka back in 2005.

For anyone unfamiliar with the famous Kolsen raid it saw Mr Champion de Crespigny round up a bunch of Australia’s rich and famous to create a pooled fund of around $110 million.

Players in the Kolsen game included the late Kerry Packer, advertising guru John Singleton, Melbourne Lord Mayor Ron Walker, investment bankers, Mark Carnegie and John Wylie, and Mr Champion de Crespigny.

Fired up by a belief that China wanted a never-ending supply of Iluka’s primary products of titanium minerals, used mainly in paint, and zircon, used mainly in kitchen and bathroom ceramics, the Kolsen boys plunged into the stock snapping up a 12 per cent stake at an estimated average entry price of $6.90 a share.

For a while they were in the money with Iluka climbing above the $9 mark. It then fell sharply, well before the crash of 2008, as the “timing challenge” for Iluka became clearer. Essentially, the Perth-based miner has had to close its WA mines and open new mines in Victoria and South Australia.

Transition is never easy, and in Iluka’s case it was awful with the company even forced to cancel dividend payments for the first time in more than a decade as the costs associated with closing and opening mines weighed on its accounts.

Three years after raiding Iluka, the Kolsen crew bailed out, achieving an average exit price of around $4.10, which means they dropped around 40 per cent of their capital, or about $44 million. Ouch.

How annoying it must be then to see Iluka starting to deliver on its delayed dream of riding Chinese demand for tiles and bathroom fixtures.

Since dipping to as low as $3.23 in late January, Iluka soared to a high last week of $5.04, up 56 per cent in 11 weeks. The stock has since retreated to around $4.80 and some stockbrokers are starting to get excited about the new look of the company.

The keys to Iluka are that it finally has a hard-nosed management team led by ex-Wesfarmers executive, David Robb, the WA mining operations are close to winding up, and new zircon-rich mines in South Australia are emerging as winners.

No one is suggesting, yet, that Iluka is heading back to the $9 peak price of mid-2005 but there is recognition that the company is on track to achieve its goal of being the world’s dominant supplier of zircon, with a capacity close to 33 per cent of world demand – and with Chinese householders still very keen on tiles, and other ceramics.

For investors, a Bystander note of caution. Before placing an order for Iluka shares remember how some of the richest men in Australia dropped a small fortune (well, petty cash for them), and that it will be at least another year before the company completes its transition and profits flow freely.

A loss is highly likely again this year, perhaps around $60 million. Next year should see the rebound with the annual profit tipped to hit $114 million, with a dividend of seven cents on the cards. Profit should rise to $154 million in 2012, and the dividend to 18 cents.

Indicating growth

The zircon rebound which is starting to be reflected in Iluka’s share price could be one of the best indications of the return of the China boom which propelled Australian resource company shares to silly heights back in 2007.

Long regarded as a mineral of secondary importance to the titanium twins of rutile and ilmenite, zircon is enjoying the benefits of high demand and supply shortage.

Until Iluka discovered the fabulous Jacinth and Ambrosia deposits in South Australia’s desert north of Ceduna (an area which was once the southern coastline of the country) there were fears that global supplies of the mineral would dry up.

Instead, the global zircon market seems to be drifting into a classic supply squeeze with Iluka emerging as the “swing” player able to effectively dictate the price thanks to having an estimated 500,000 tonnes of installed capacity in a market demanding around 1.1 million tonnes a year.

From next year the squeeze starts to bite, with the currently balanced market (supply roughly matching demand) drifting into a shortage and the price rising from around $US800 a tonne to as high as $US1,400/t by 2014.

These are the conditions Mr de Crespigny expected to start occurring five years ago, proving that being too early at a party can be as painful as being too late.

Detroit woes

Here’s proof of something we have always known to be true. Americans make horrible cars. This can now be demonstrated because most vehicles sold by Detroit’s big three (General Motors, Ford and Chrysler) aren’t cars at all. They’re trucks and pick-ups.

In GM’s case, according to the latest data, cars account for 46 per cent of all vehicles. Ford’s cars accounted for 38 per cent of sales, and Chrysler’s cars 27 per cent of total sales.

What then do American car owners buy? Same as us. Toyota, Nissan, Honda, and exotic Europeans.

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“‘Why’ and ‘how’ are words so important that they cannot be too often used.”

Napoleon Bonaparte

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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