10/11/2014 - 13:05

Push to exploit SW bauxite resources

10/11/2014 - 13:05

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The South West may be the scene of a political and environmental battle over bauxite mining not seen for 30 years.

Push to exploit SW bauxite resources
WIN WIN: WA’s refineries are receiving stronger prices for exports thanks to weaker global supply and strong demand.

The South West may be the scene of a political and environmental battle over bauxite mining not seen for 30 years.

Western Australia’s mining industry needs a winner after the collapse in the price of gold and iron ore, but the optimistic outlook for one mineral has the potential to reignite a political and environmental brawl most people have forgotten.

Bauxite, the primary ore of alumina, which becomes aluminium, is enjoying a remarkable revival in world markets thanks to a combination of poor planning by the aluminium industry and stronger demand for the lightweight metal.

The demand increase can be traced to high levels of construction activity after the end of the GFC, plus a boom in vehicle sales thanks to ultra-low interest rates that have encouraged car owners to trade up, especially in North America.

The planning mistake lies in the fact that too many aluminium-producing countries recognised the metal as a way of ‘monetising’ excess energy. The best example of this is a huge new Alcoa-run smelter in Saudi Arabia, which was built purely because of low electricity prices available from the burning of surplus gas that might otherwise have been flared.

While energy is the biggest cost in making aluminium, a metal once referred to as ‘congealed electricity’, it also requires large amounts of bauxite, after it is converted into alumina.

The problem in this three-layered process is that the supply of bauxite has shrunk, through a combination of government interference in the market, declining ore grades in some countries, and the Ebola crisis in West Africa, which is a major source of the ore.

The biggest immediate issue affecting bauxite supply is the Indonesian government’s ban on the export of unprocessed minerals, an action that is also affecting the supply of nickel.

For WA, the bauxite squeeze is good news because it means that the biggest mining industry in the state’s South West – the four alumina refineries operated by Alcoa Worldwide Alumina and BHP Billiton – are enjoying stronger prices for their exports.

But the real issue in the bauxite/alumina/aluminium business is at the start of the process; and that’s where there are changes under way as demand for ore, especially by Chinese alumina refineries, has triggered a rush fill the gap left by Indonesia.

The biggest shift in the Australian bauxite industry so far is a decision by Rio Tinto to close its alumina refinery at Gove in the Northern Territory, switching that business into a simple dig-and-deliver bauxite exporter.

The next big development could be the start of unprocessed bauxite exports from the South West of WA, a move with the potential to stir environmentalists into action because the bauxite being targeted for export lies close to the forests of the Darling Range.

Bauxite Resources, a small Perth-based company with strong Chinese connections, is leading the push to export bauxite from a series of deposits it has identified in a vast tenement holding that runs from north of Toodyay to the south of Collie, and as far east as Narrogin

The areas claimed by Bauxite Resources effectively surround the bauxite mines currently operated by Alcoa and BHP Billiton, with some of them covering a region once earmarked by the Pacminex joint venture of the late Lang Hancock and the sugar refiner, CSR.

Until recently, and largely because the bauxite price was low, exporting unprocessed Darling Range material was a marginal proposition, because while it converts relatively easily into alumina (it needs less heat than most other bauxites), it is low-grade material with an aluminium content of around 38 per cent compared with the 50 per cent grade in ore mined at Gove.

Bauxite Resources is not alone in trying to break into a business dominated by some of the world’s biggest mining companies. In the eastern states, several bauxite-mining proposals are also close to starting, thanks to the higher prices.

If the challenge of low grades can be overcome, and a reliable logistics solution found, it is possible Bauxite Resources will push ahead with its mine plan – and for environmentalists to be stirred into action, as always happens with bauxite mining in the South West.

Back in the 1970s and 1980s, the biggest environmental (and political) battle of the time was over the expansion of Alcoa’s operations in the Darling Range and the development of the Worsley refinery near Collie.

WA might be about to see a rerun of that famous fight.

Not so healthy

Excitement about the imminent float of Medibank Private is easy to understand because it is a business in the right industry – health – at the right time, particularly considering Australia’s ageing population.

Whether Medibank will prove to be a good investment is questionable on two grounds – the float price and future growth of the business.

The price issue is the more remarkable because investors have rushed the float without knowing what they will pay, apparently prepared to throw $12 billion at a share offer in the belief that Medibank will do as well as other government spin-offs such as Commonwealth Bank and CSL.

Perhaps it will, but to invest without knowing the price is either putting enormous trust in government and the banks handling the deal, or a reflection of the huge amounts of cash sloshing around in self-managed superannuation funds.

As for the profitability of Medibank, no-one seems to be questioning forecasts of strong future earnings and dividends without asking whether that will be possible given the temptation of governments to interfere with health policy, or whether the only way Medibank can grow its profits is by cutting its costs – and no-one ever cut their way to greatness.

As a guide, consider the income level of your family doctor. He or she might seem to be well off, but tight government controls and high costs actually mean that working long hours for a limited return is the norm.

Health might be a growth industry but that doesn’t mean it’s particularly profitable.

 

Free mines

Here come the vultures. The launch of Auctus Minerals with a $130 million war chest is a timely reminder that bargain hunters are starting to examine some of WA’s troubled small miners.

Auctus will not be alone. Other investors are also starting to take close look at companies that are struggling, such as Mt Gibson Mines, which has slipped to the point where it has the same amount of cash in the bank as it is worth on the stock exchange – meaning a buyer gets its mines for free.


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