11/02/2010 - 00:00

Infrastructure woes shift balance of power

11/02/2010 - 00:00

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South Africa’s problems could be good news for WA.

THERE are many reasons to visit Cape Town, though not all tourists come away with a fresh investment idea. Bystander did, though it took a few days to realise that bad news in South Africa is good news for Australia.

The discovery was made while attending the annual Mining Indaba conference, a meeting which was especially interesting this year because it was the first big mining event since the global financial crisis peaked.

While the other 4,000 delegates busied about looking for deals, and ways to market their products, Bystander was fascinated by the subject no-one wanted to talk about; the price of electricity and the fact that it will double over the next three years.

Bad planning, lack of investment and a government under pressure to deliver services even more basic than power, such as running water and medical facilities to the poor majority, has led to a crisis in South Africa’s electricity industry.

The result is a national grid on the verge of collapse almost every day, repeating an embarrassing shutdown that occurred days before the 2008 Indaba gathering, leaving hundreds of tourists stranded on top of the stunningly beautiful Table Mountain.

Two years on and little has happened to repair the grid, though the government has realised that the only way to raise the money to pay for more power stations is to hike prices, not by small increments, but by boosting bills by 35 per cent a year, for each of the next three years.

Somewhat surprisingly South Africa’s minister for mines, Susan Shabanga, made no reference to electricity costs when opening the Indaba conference, an oversight that a foreign visitor spotted but which the locals took in their stride because of an entrenched habit of avoiding unpleasant topics; apartheid 20 years ago, and crime and HIV-Aids today.

The ghost of electricity costs initially avoided Bystander and it took a meeting with a couple of Perth company promoters to realise where value-creation might lie back in WA.

Michael Naylor and Clayton Dodd are also in the ‘ghost business’, busily trying to resurrect the oft-failed Weld Range chromite and iron ore deposit near Meekatharra. The plan is to use the unique ore body to produce a steel alloy in demand by Asian stainless steel makers.

Previous attempts to commercialise Weld Range have failed because of transport issues and power costs. Today, there is the promise of the new Oakajee rail and port system, gas-fired power – and the invisible helping hand of South Africa’s well-established metal alloy business being clobbered by soaring power costs.

Bystander is not suggesting you rush out and invest in the soon-to-float Weld Range Metals, but is suggesting that if the South African government delivers on its promise of massive increases in power costs then Australian mining, especially the mineral-processing sector, will be a big winner.

In effect, one of the major rivals to the Australian resources industry is proposing to price itself out of the market because electricity is a cost that cannot be avoided, whether in direct mining, smelting, or on the electrified rail system, which hauls bulk commodities to the coast for export.

Windimurra in play?

WELD Range was the project to trigger the realisation that power costs are a universal issue, and that in the past it was low power costs in South Africa that killed-off a number of WA projects.

The best-known of these is the Windimurra vanadium project, which has had a series of false starts, falling each time because of technical issues in the heat-intensive process, or because South African vanadium (a steel hardening metal) could easily undercut Windimurra.

The last time Windimurra died it even led to a state parliamentary inquiry, with backbenchers pointing angry fingers at the project’s then owner, the multi-national Xstrata group which is technically based in Switzerland, but actually run by a team of former South African miners.

It was the South Africans who understood the simple economics of vanadium – the metal they made back home was cheaper than what Windimurra could do.

The game is changing, with new owners led by the aggressive Mineral Resources group confident that this time it will be different for Windimurra; and perhaps they’re right because of what’s about to happen to electricity prices in South Africa.

A better look

THE impact of rising power costs in South Africa was not the only opportunity spotted for Australian investors during the Indaba conference.

A second theme was in the area of exploration and how small Australian-led companies continue to make discoveries that have eluded the locals for a few hundred years.

Aquarius Platinum was the first Australian company to demonstrate that fresh thinking creates value. Extract Minerals is doing it again, turning itself into a $2 billion company thanks to the discovery of a world-class uranium deposit on the border of Rio Tinto’s giant Rossing mine in Namibia.

The decision by Rio Tinto management to not explore beyond its mine will one day be recognised as one of the mining world’s great bloopers, gifting several billion dollars to shareholders in Extract.

Following the same idea of overlooked opportunity, the small Australian explorer, Sabre Resources, has pegged a large tract of land immediately south of the famous Tsumeb copper mine in Namibia. Operated for more than 100 years Tsumeb was once one of the world’s great mines.

But, in keeping with the tradition of not looking too hard, no-one ever bothered to look beyond the immediate mine area, which is what Sabre has been doing, discovering outcropping mineralisation rich in copper, lead and zinc. Drilling starts after the wet season end in March.

Cost … benefit

A FINAL thought on Indaba and the people who paid most to attend. It was you, the Australian taxpayer, who funded “the Minister’s Lounge” on the mezzanine floor of the Cape Town conference centre. Out of the way, unattended, and aloof from the crowd below. With seating for 40, Bystander’s maximum head count of people using the Australian facility was seven, fewer than the staff on hand.

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“The great glory in living lies not in never failing but in rising every time we fall.”

Nelson Mandela

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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