27/09/2013 - 06:27

Niche miners need to step up

27/09/2013 - 06:27


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Niche miners need to step up

Exotic and minor metals are never a natural fit for small mining companies, a fact discovered by shareholders in struggling lithium producer Galaxy Resources, and a threat that hovers over the heads of local favourites Lynas Corporation and Paladin Energy.

Galaxy’s troubles came to a head in April when trading in the company’s shares were suspended after it encountered production problems at a factory in China, and its one-time flagship mine near Ravensthorpe on Western Australia’s south coast was mothballed.

The details of Galaxy’s woes are irrelevant to the central point, which is that small miners lacking financial stamina, marketing skills and management depth always struggle to cope with a downturn in

demand, high levels of competition and lower commodity prices.

It’s far better – as iron ore, copper, coal and gold miners have discovered – to be involved in products in high demand and where minimal marketing skills are required.

Galaxy’s choice of mineral – lithium – has the appeal of being one of the so-called ‘metals of the future’ thanks to its use in high-tech, long-life batteries. But it is not a metal in short supply and demand is not strong, yet.

Lynas and Paladin, while not under the same immediate pressure as Galaxy, could face a testing time over the next 12 months unless they start to deliver on their promise.

Both companies suffered further heavy financial losses in the year to June 30 as the price of their chosen minerals, uranium and rare earths, remained lower than forecast, and both continued to incur production hiccups.

Paladin, a company that made millionaires out of its early backers, wrote another $US305 million off the value of its assets; a move that lifted the loss for the year to an eye-catching $US420.9 million, more than double the previous year’s loss of $US172.8 million.

Despite the best endeavours of its management team, the problem for Paladin is that it is being whacked by a low world uranium price. And no amount of protesting, or claims that uranium will make a sudden return to popularity, can get away from that point.

The fact that Paladin produced uranium at a cash cost of $US33 a pound last financial year and received an average price of $US49.50/lb does not resolve the underlying problem of financial pressure, because a cash cost is not the full cost – as has been clearly demonstrated by the new cost reporting recommendations of the World Gold Council. And while uranium is not gold, costs are costs.

Investors continue to treat Paladin harshly, partly because of the losses and partly because of the continued need to raise fresh capital. Over the past 12 months the stock has fallen from a peak of $1.40 to recent trades at 53 cents – a fraction of $10.44 reached in early 2007 when uranium was hot.

Lynas’s struggle is perhaps more of a surprise, because rare earths were an even hotter commodity than uranium, for a while.

However, Lynas incurred a loss of $141 million last financial year, up substantially on the previous year’s loss of $97.9 million as it struggled to hit its production

milestones for a variety of reasons and the once-booming rare earth market failed to fire.

On the stock market, Lynas delivered the same sort of performance as Paladin, falling from $2.55 in early 2011 to recent trades at 40.5 cents.

Investors remain hopeful that Paladin and Lynas will stage comebacks, or they would not still value Lynas on the stock market at $794 million and Paladin at $510 million, which is a remarkable $1.3 billion for a pair of heavy loss makers.

Analysts who follow both companies have become jaded by the run of poor results and the need to make regular requests for more capital from shareholders, and are concerned about the need for future discounted share issues.

Bank of America Merrill Lynch best summed up Paladin’s dilemma in a note to clients earlier this month: “Paladin suffers from higher costs and gearing than peers in a weak uranium market”, adding that “uranium price weakness may persist for a while yet”.

UBS lamented the latest loss from Lynas and forecast another loss in the current year, telling clients last week that: “Based on ongoing weak end markets for rare earths we have lowered both our production estimates

and rare earth oxide price forecasts. Subsequently, our financial year 2014 earnings estimate has fallen from a profit of $98 million to an operating loss of $112 million.”

Deutsche Bank was more to the point about Lynas, tipping the need for the company to secure additional debt or equity to bridge a funding gap. It rated the stock a ‘sell’ and tipped future share price of 30 cents – which is below UBS’s 42-cents price forecast, though that price represented a hefty discount on the previous UBS price tip of 57 cents.

Port pressure

IF the state government is to sell some of its port interests the one most likely to fetch a high price is Port Hedland, not just because of what is shipped out today, but what’s to come as iron ore miners squeeze greater volumes out of an already busy port.

Gina Rinehart, for example, wants to ship 55 million tonnes from her allocated berths in Port Hedland. Andrew Forrest is lifting Fortescue Metals Group to a target of 155mt and BHP Billiton is thinking about shifting 300mt a year.

While the plans of Mrs Rinehart and Mr Forrest are well known, the ambitions of BHP Billiton are a closely

guarded secret; but they are also a reaction to Rio Tinto expanding its twin ports (Dampier and Cape Lambert) at a time when its own Port Hedland outer harbour plans have been dropped as a cost saving measure.

Fired by Rio Tinto’s expansion, BHP Billiton has been quietly briefing analysts on its plan to extract maximum value from its inner harbour facilities at Port Hedland, a push which could signal problems for smaller miners as it seeks to expand its allocation of shipping slots.


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