Pickaxe maker the best pick

PICKING winners in the mining sector has become a tricky business, especially with the first flush of the boom coming to an end.

Until now, anything with the word nickel attached has been a winner but in future it will be a case of quality versus dross – so why not try a different tack and apply the mining industry’s original money-making recipe, buy the “pickaxe maker.”

In all mining booms, and we are in a boom, there are very predictable stages. First comes a tremendous price surge by companies actually in production and able to make profits from rising metal prices.

Jubilee’s run from $1.41 to $4.82 over the past 12 months is an excellent example, as is Mincor’s move from 26 cents to $1.08 and Independence rising from 27 cents to $1.49. The excitement among the small stocks has now spilled over into market leaders such as WMC, Alumina, Rio Tinto and BHP Billiton as professional investors and institutions wake up to the changed outlook – one of strong global economic growth and a worldwide shortage of minerals and metals.

The next six months will produce flushes of excitement but will also lay traps for novice investors (let’s be honest and call them what they are, speculators).

Trap One: With the flood of new floats, test the quality (and honesty) of management and measure the bulldust factor. The Australian outback is littered with nickel. The car park at the Leonora pub probably grades 0.5 per cent – but it is not a commercial mine.

Trap Two: Watch out for recycled mines, mineral prospects and company promoters – the boys (and girls) who have gone from gold-to-technology-to-oil-to-nickel.

Ask a simple question: “Are these people serious about the business they’re promoting, or serious about milking my wallet” – we all know the answer, so don’t be stupid.

Finding quality will be much harder in the next phase of the boom simply because the existing projects are spoken for, new mines take time to develop (a nickel discovery today will come into production just as the cycle turns down – which it will) and exploration is much, much harder because in this boom we have a law called Mabo and “gate money”, the land access fee, has just gone up.

So, back to the words of advice. Who are these so-called “pick-axe” makers?

They are the companies that sell a service that everyone has to use. In the mining booms of the 19th and early 20th centuries they were the people selling prospecting equipment, hardware stores and travelling salesmen. They literally sold pickaxes.

Today, it is the consulting companies; the drilling and mining contractors; and the engineers.

Ausdrill is a case study. Its shares have doubled from a 12-month low of 34.5 cents to around 70 cents. And that is before the capital being raised on the market today is applied to exploration and the Ausdrill order book expands from organic growth and additional acquisitions to follow its purchase earlier this year of the Drillex business.

Ausdrill had a horrid time a few years ago and it is run by a bunch of not very nice people, but it is well run. Profit rose from $8.7 million in 2002 to $10.6 million in the latest year, the dividend was lifted from 1.5 cents to 2 cents a share and net tangible asset backing rose to 61.7 cents a share – not far short of the current share price.

A good starting point to learn a bit more about Ausdrill is its annual meeting, 4pm at Parmelia Hotel on November 26 – comments there will provide a genuine test of the mood of the boom.

On the same theme, there are other “pick-axe” floggers worth looking at.

Engineering and mining contractor, Macmahon Holdings is growing again, the owner of the Minproc Engineers business, GRD, has a growing order book, and Downer EDI is well placed to win work from its Roche Mining subsidiary.

WHAT do we do with Andrew (call me Twiggy) Forrest?

Should he be taken seriously with the appointment of Sebastian Coe and Herb Elliott to the board of Fortescue Metals Group, or is it just a silly joke.

Briefcase, which has nothing against either man, wonders what it is that they bring to Fortescue, apart from an ability to run fast. It re-kindles memories of a New Zealand Government Minister once praising one of that country’s businessmen by saying “he was an All Black, you know”.

Oh yes, an ability to pass a football and bash your head against that of an opponent is a key to being good at business – pull the other one.

Students of history will also remember that the game of loading a board with worthy names is not new, nor does it often work.

Kingstream Steel once proudly boasted of its recruitment of a former British Chancellor. Precious Metals Australia once had a Lord something-or-other on its board.

Neither company came to much.

The job at Fortescue is monumental. It wants to create an iron ore project in direct competition with the world’s biggest miners, while building a railway and a port – projects which will cost billions of dollars (not millions) from a base which, at current share prices, values the entire company at $19.5 million.

For the record, the day on which the appointment of Coe and Elliott was announced, Fortescue’s share price rose by 1.5 cents to 27 cents.

Perhaps someone should start a book on how long Coe and Elliott stick it out at Fortescue. Opening quotes should be between 12 and 18 months.