10/12/2015 - 12:54

Miners counting more nickels than dimes

10/12/2015 - 12:54

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Mining and debt have always been a deadly combination, especially for investors, but toss in a stiff dose of politics and you have a brew infinitely more volatile for everyone, including government.

HELP: Clive Palmer has approached the Queensland government for up to $40 million.

Mining and debt have always been a deadly combination, especially for investors, but toss in a stiff dose of politics and you have a brew infinitely more volatile for everyone, including government.

In Australia, the cocktail of debt, mining, and politics can be seen bubbling away in the troubles of Clive Palmer and his Queensland nickel refinery and iron ore interests in Western Australia.

In South Africa, there is a potentially even more explosive situation emerging as the once-great Anglo American group undertakes what looks to be the world’s most painful example of ‘self-surgery’.

Other examples will emerge as the commodity price collapse destroys corporate balance sheets and the reputations of the people who flew high in the boom (and are now landing with a thud across the mining and oil sectors).

There are many old sayings to illustrate what’s happening, with the gentlest being that ‘all boats lift on a rising tide, and sink back into the mud when the tide goes out’, which is what’s happening if you think of commodity prices rising and falling and how the movement affects all producers.

Another snappy description is that: ‘In a stiff breeze even turkeys can fly’.

The breeze of sky-high prices for iron ore, nickel, oil, coal, copper, and just about any other commodity you care to name, has well and truly blown itself out and the turkeys are returning to earth, getting ready for their starring role as part of Christmas festivities.

In South Africa, the return of the Anglo American turkey after a period high above everyone else (when it ranked in the 1980s as the world’s biggest mining company) will be sending shockwaves through a country even more reliant on mining than Australia.

The biggest reaction will come from the plan by Anglo American to sack 85,000 workers and to close, or sell, up to 35 mines. In effect, the company founded by the Oppenheimer family in 1917, which grew to be the world’s biggest gold and diamond producer, is cutting itself in half as part of what can also be described as a scorched-earth survival strategy.

Will it work? The jury is out because there are plenty of critics who doubt that the dramatic shrinking of Anglo American will achieve the aims of management, or will even be achieved at all once South Africa’s government and militant unions step in.

Of primary interest to unionists and government officials will be how much of Anglo American’s cutting is done in South Africa and how much is done elsewhere, with particular attention paid to cuts in Australia given the fact that the company is led by an Australian, Mark Cutifani, for now.

In Australia, the Palmer case must be dredging up memories for anyone who lived through the late 1980s when a number of local entrepreneurs, and a few politicians, got together to try and save companies in trouble, including Bell Group and Bond Corporation.

Back then, as now, the problem was all about falling asset values and a need to source cash from somewhere to keep a number of businesses operating.

WA’s premier at the time, Brian Burke, was most accommodating to a number of businessmen, including Alan Bond, Laurie Connell and Robert Holmes a Court. The result of Burke’s attempt to play fairy godmother with the state’s cash turned into a long-running saga that is still playing in a number of courtrooms.

Mr Palmer’s appeal to Queensland Premier Annastacia Palaszczuk for a cash handout of up to $40 million is not in the same league as Burke’s rescue of Bond Corporation but the principle is the same – a troubled business asking for taxpayers’ funds.

By just asking, Mr Palmer is trying to turn his financial troubles into a political issue, inferring that unless the Queensland government provides the required cash, and quickly, more than 600 people will lose their jobs.

What Ms Palaszczuk probably already knows is that Mr Palmer’s Yabulu nickel business could need much more help than a short-term loan, because the price of nickel is showing no sign of a rapid recovery and, at less than $US4 a pound, will be well below the project’s break-even level.

What’s happening with Mr Palmer and Anglo American is an early taste of what should be a wild adjustment process to lower commodity prices, as companies with too much debt and too few profitable assets do whatever they can to try and stay alive.

Some will make it but most will not, a fact that politicians invited to the corporate rescue parties should not forget; but if they do, could someone please remind them of Bond, Bell, Connell and Holmes a Court.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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