Gold exodus has locals tarnished

OVER the past five years the ownership of WA’s gold mines has headed offshore with Newcrest among the few to have escaped the attention of raiders from South Africa and North America.

Gold sector profiler Surbiton Associates Pty Ltd managing director Sandra Close said five years ago overseas control of Australia’s gold production was around 20 per cent. By 2000 it had climbed to around 30 per cent and today 70 per cent of production was foreign-owned.

The Department of Minerals and Petroleum’s annual Statistics Digest tells the story another way. In 1997-98 it listed 45 WA gold producers. Figures released last week by the department suggest that this number has fallen by more than half through consolidation and buyouts from overseas producers.

DJ Carmichael senior analyst Peter Strachan said it was clear from takeovers such as Newmont’s purchase of Normandy and Placer Dome’s takeover of AurionGold that different numbers were being used to determine the premium attached to a gold company.

While most analysts put AurionGold’s net present value at between $1.50 and $2 a share based on production rates and current reserves, Placer Dome’s offer stretched the value out to $3.05 a share.

“Clearly they were viewed as too cheap. It is widely thought that Newmont paid too much for Normandy. It is difficult to understand how they justify it,” Mr Strachan said.

“While it might cost us $20 an ounce to find gold, they are paying $220 an ounce to pay for existing reserves.”

Dr Close said part of the explanation for the premium paid by the gold giants rested with the low Australian dollar, which made Australia attractive to US investors. Another reason was Australia’s relatively low sovereign risk compared to other countries.

“Australia is a pretty stable place to invest and work in and Australians place it as a given so we don’t put a value on it,” she said.

But even these attractions do not fully explain the premium prices.

Mr Strachan said the gold giants were under enormous pressure to maintain their gold reserves in the interests of providing investors with long-term horizons.

“The chances of you discovering enough gold every year is very low, so the only way to increase your reserves is to buy another company, if you want to maintain a 10 to 20-year life,” he said.

If a company is a two million ounce per annum producer this means it will need reserves in place in the order of 40 million ounces. Otherwise the company is seen as just depleting its reserves.

Having access to high reserves and having the ability to leverage the gold price is viewed by some analysts as being more important than running a low cost mine to maximise profit.

US investors are willing to buy into companies based on a different benchmark and throw out the traditional net present valuation using discounted cashflows.

When the price of gold is high, Americans price the major producers at premiums of two to three times net present value.

They then use their high-priced paper to launch bids using valuations beyond what local Australian investors are willing to pay.

Whatever the driver, Dr Close said she believed more could have been done to prevent what had occurred over the past five years in the sector. She said it was not too late.

But consolidations in the upper echelons of the industry, which has stopped local investors from buying into the large producers, has provided capital rising opportunities for a number of new exploration and mining companies.

On Tuesday the latest Perth-based gold company, Monarch Resources Limited listed on the Australian Stock Exchange after raising $2.75 million. On its first day it closed 15 per cent above its issue price at 23 cents a share.

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