26/03/2008 - 22:00

Opinion: Mark Beyer

26/03/2008 - 22:00


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Opinion: Mark Beyer

Finance fall-out still a big unknown


One of the most common topics for discussion in the local business community is the likely fall-out from the problems hitting the banking and financial sector, particularly in the US.

The generally accepted view in Western Australia is that the continued strength of the Chinese economy will be the key driver, and will largely insulate local business from any adverse fallout.

There is a lot of merit in this line of argument, and it will probably prove to be correct, but in the meantime, a number of casualties are starting to emerge.

The most obvious is on the stock market, where the ability of companies to raise capital has weakened sharply.

The recent decision by ammonia manufacturer Burrup Fertilisers to pull its planned initial public offering, which was looking to raise about $500 million, is the prime example.

The Burrup business will continue but the ability of its key backers, India’s Oswal family, to cash in has fallen away.

Another casualty of sorts has been the unlisted public company, Australian Finance Group.

AFG is a great WA success story, building a leading position in the national mortgage origination market.

Ironically, AFG said last month that it had been the victim of mistaken criticism because some investors had confused it with the struggling Sydney-based Allco Finance Group.

The two businesses are far removed but the fact remains that Perth’s AFG operates in the mortgage origination sector, one of the areas that has been hardest hit by the problems in the finance sector.

AFG had been planning a stock market float last year but pulled back when the sub-prime crisis blew up unexpectedly.

Its plans for a stock market float must be even more remote – which isn’t necessarily an issue for the business, but it will be for the owners of the business who will have to change their plans.


Project developers take a hit


Mining companies that are poised to benefit from the Chinafuelled resources boom have also been hit by the problems in the finance sector.

Moly Mines Ltd, which is planning to invest more than $1 billion in a new molybdenum mine, disclosed last week that it had been unable to meet its target for reaching financial close.

Its target is now loosely described as the second half of 2008.

Windimurra Vanadium Ltd has been hit by the same issues.

It has an advanced project, has completed detailed feasibility studies that showed a robust project, and has even ordered long-lead capital equipment, but has been unable to lock away all of the funding needed.


Varied outlook for commodities


While commodity prices in general remain strong, this does not apply across the board.

The uranium market, in particular, has failed to remain as strong as most pundits had been predicting during 2006 and the first half of 2007.

The spot uranium price is currently trading around $US74 per pound, down 20 per cent from its level three months ago and 46 per cent off the high of $US138/ lb reached in June 2007.

The market expectation is for a uranium price of $US105/lb by September 2008, according to a research report by Sydney-based Resource Capital Research.

That’s a handy uptick from the current level but still short of the bullish assessments being made 12 months ago, when there was an almost universal view that prices would head north.

Investors in uranium stocks have suffered as a consequence.

Funds manager Oceanic Capital Management has also been adversely affected, after being forced earlier this month to pull the planned float of a $50 million listed investment company that was planning to invest in uranium stocks.

The 10-month-long correction in the uranium market should serve as a salutary warning to investors and business planners who assume that bullish growth in commodities will continue as it has in the iron ore and gold markets in recent times.


Big players loom


Like commodity markets, it is dangerous to generalise about funding issues.

 Apex Gold Ltd completed a successful $62 million capital raising earlier this month and Iluka Resources Ltd is working its way through a much larger capital raising.

But there are plenty of others that will struggle, and that is likely to suit bigger, cashed-up companies that will continue pursuing acquisition opportunities.

The targets range from iron ore developer Midwest Corporation Ltd, gold miner Equigold and project developer Herald Resources Ltd .

The list will grow, possibly even including mining giant Rio Tinto Ltd if its aggressive rival BHP Billiton Ltd gets its way.



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