15/05/2014 - 14:36

Resources positivity gains currency

15/05/2014 - 14:36


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Resources positivity gains currency

It may not be a feeding frenzy, yet, but the flood of deals in the Australian mining industry is a pointer to a significant and very positive mood swing.

For the first time in two years, significant amounts of capital are being rotated out of safe bank accounts and interest-bearing deposits into the ultimate form of cyclical investment – resources.

Time will tell whether the early movers, such as the comeback coal-kid, Nathan Tinkler, has moved too soon, or whether they really are snapping up bargains in the mining basement.

But whether or not risk takers are getting ahead of the market, there is no doubt that a deal-making rush is under way and that in time it will trigger a much-needed revival in the hard-hit small end of Western Australia’s exploration and mining sector.

Mr Tinkler’s deal is a template for what’s happening. Widely dismissed as an entrepreneur who had done his last deal and was now enjoying a comfortable lifestyle in Singapore, far from prying Australian news hounds, he has burst back on the scene with what looks like the super-cheap acquisition of a mothballed Queensland coal mine.

Up for sale last year with a price tag of $500 million, the Wilkie Creek mine has been snared by Mr Tinkler from US-based Peabody Energy for $150 million, with $70 million in cash up front and the rest for assuming rail and port commitments.

Barry Tudor, a less familiar name in the coal game, is also plotting a return via a well-funded company seeking coal assets.

Pembroke Resources is starting life with a $US200 capital injection from US fund manager Denham Capital, enough for Tudor and a team of fellow former senior executives from Gloucester Coal to go on mine hunt.

In WA, the big deal brewing is the proposed sale of the BHP Billiton Nickel West business, an exit that has been several years in the making with nickel no-longer a favoured metal of a company that prefers its commodities in bulk form – especially iron ore, oil, coal, open-cut copper, and potash.

The real interest with Nickel West is not that BHP Billiton is selling but who might join the queue of tyre-kickers visiting the mine and ore-processing facilities, and whether the eventual buyer is interested in a quick asset-stripping exercise or if there is a plan to invest and grow a business in desperate need of a new and interested owner.

Baosteel and Aurizon bidding $1.4 billion for WA iron ore project developer, Aquila Resources, is another example of the deal-pressure building in the mining sector, as is another $1.4 billion deal – the proposed acquisition of the copper miner, PanAust.

Bill Beament’s non-stop rush of gold asset acquisitions for the company he runs, Northern Star Resources, is a sign that interest in gold has not died completely, despite it seeming that there are more sellers of the commodity in world markets than buyers.

Depending on the price BHP Billiton gets for Nickel West, and the final price for Aquila and PanAust, there’s the potential for several billion dollars to be injected into the mining sector; and it is the flow of capital in (rather than out) that marks the return of resources, and a fresh start for mining in WA.

With luck, and without a sharp correction in key commodity prices, the scene has been set for a rapid increase in the level of corporate activity in the mining sector, starting with deals and fresh investments at the top end of the sector before flowing down to smaller operators.

At the risk of boasting the revival that seems to be developing, it was clear a head of steam was building at the Mines and Money conference in London late last year, an event that prompted me to write in early December in this column that: “Evidence of early interest in Australian resources can be found  … and while no-one is talking about a sudden revival of mining investment they are certainly talking about commodity prices having hit the bottom”.

US investment bank, Citi, picked up that theme in January, adding its name to a list of commodity optimists – with a rider that it might be too early with its optimism, but “that it’s better than being too late”.

And then last week came the unbridled confidence of analysts in the London office of JP Morgan Cazenove, who upgraded mining as an investment theme to ‘overweight’ from ‘underweight’.

The JP Morgan view of the world is that “this is an opportune time to build exposure (to mining) ahead of expected second half outperformance.

“Having been structurally bearish on mining for over two years, JP Morgan’s European equity strategy team has upgraded the sector to overweight,” the bank said in May 12 note to clients.

The boom might not be back, but at least the bust is fading – for the survivors.


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