SoG fall shows buy local risks

WITH the dust still settling in the plush Parliament Place head office of failed goldminer, Sons of Gwalia, two powerful lessons can already be learned by investors. First, never back a business just because it lives locally. Second, take note of the remarkable rise in broker sell tips.

Neither of these is much comfort for anyone left holding a few Sons of Gwalia shares, but both should be noted for future reference.

On the "local business" problem, Briefcase has been a regular campaigner on this issue simply because it has seen so many rising stars crash and burn. In the 1980s it was the spectacular departure of Bond, Bell, Parry, Rothwells and their ilk.

A quick glance at more recent events shows that while there might not have been the same number of spectacular failures over a short period of time there has nevertheless been a steady stream of problems.

Anaconda Nickel is a good example of a business which promised the world, saw its shares soar, and then came crashing back before staging a revival under the new name of Minara. ERG has not changed its name but it has been a bitter disappointment to thousands of local fans, and Orbital Engine limps along, a shell of its original self.

In each case, astute investors detected early signs of problems. Missed construction deadlines, sluggish sales, or management upheaval. In hindsight, the clues stand out quite clearly with the only problem being the common characteristic of company spokesmen saying that all is well, don’t panic.

In the case of Sons of Gwalia there have been repeated indications of difficulty that has been discounted by a belief that the team in charge would eventually solve whatever crisis came up. What just about everyone missed was the significance of the management upheaval that led to the retirement of the Lalor brothers who had been the glue keeping the business intact.

It is history now, but it will be a debating point for years, as to whether Peter and Chris Lalor could have held Sons of Gwalia together during its latest crisis, and whether the new management team simply panicked when threatened by a bank.

Briefcase has no special knowledge of the case but it has seen early examples of banks thumping the table, demanding priority treatment and forcing management into a corner. Strong managers fight back, and survive. Darrel Jarvis, despite winning few friends, beat down the banks and played a key role in the survival of Janet Holmes a Court’s Heytesbury Holdings by routinely waving what he called his "bank negotiating device" at bankers – it was a large wooden mallet with the initials BND burned into the head with a branding iron.

Peter Lalor probably showed greater finesse than Darrel, but the result was the same. The banks were kept at bay despite performing a tricky balancing act with low cost mines and a lack of exploration success on one hand and a very large hedge and loan book on the other.

While the vultures pick over the Sons of Gwalia carcase the other point to note is the rising tide of sell tips from brokers and to understand that they are a more valuable commodity than recommendations to buy.

Until recently, a sell note from a broker was a very rare commodity, simply because brokers could not see the value in being negative about a company with which they might one day do business. A notable exception was a famous sell tip from John McDonald at CIBC who earned the ire of Peter Lalor a few years back when he gave Sons of Gwalia an early thumbs down.

Also on the sell side of Sons of Gwalia was the team at Patersons which has been warning clients for years about the stock and even stuck a firm sell on it in early August while it was trading at $1.45 – perhaps some of the best advice a local broker has ever given.

What is more remarkable than that tip on a single stock is that Patersons has taken the role of independence in broker research to an astonishing height by producing a study of the resources sector which has an equal number of buy and sell tips, 10 on each side of the ledger.

The buy tips as at an August 5 cut-off date were: CBH Resources at 20 cents (now 19.5 cents), Equigold $1.42 ($1.54), Independence $1.07 ($1.04), Jubilee $4.38 ($4.03), Minara $2.20 ($2.05), Oxiana 80 cents (79 cents), Sally Malay 60 cents (75 cents), Tap Oil $1.67 ($1.67) and Tritton 81 cents (79 cents). More down than up, but no screaming disasters.

The sell tips were: Amity 68 cents (60 cents), Consolidated Minerals $1.41 ($1.61), Emperor 85 cents (69 cents), Iluka $4.55 ($4.64), Newcrest $13.96 ($15.14), Perseverance 26 cents (27 cents), Portman $2.05 ($1.90), Sons of Gwalia $1.45 (zero), Sydney Gas 91 cents (91 cents), Zinifex $1.88 ($1.83).

A few wrong, but a disaster avoided – and a very admirable precedent of independent advice set.

ASK any reasonably knowledgeable wine lover to name the leading wineries of the Margaret River region and there is every chance that the name Vasse Felix will crop up.

Apart being owned by one of Australia’s richest people in Janet Holmes a Court, it is widely regarded as the original vineyard development in the area.

What a surprise then to read the back page of the latest issue of  Magnum, a high-class, 12-page magazine produced by another equally well-known Margaret River winery, Voyager Estate, owned by the "richer-than-Janet" Michael Wright.

Listed as the eight "leading" producers in the area are Voyager (naturally), Leeuwin, Cape Mentelle, Devil’s Lair, Cullen, Moss Wood, Howard Park and Brookland Valley. No mention of Vasse Felix.

Perhaps it’s an oversight. Perhaps a printer’s error. Perhaps another of those curious little disputes that crop up in the argumentative world of wine and rich people.

"A horrible voice, bad breath, and a vulgar manner – the characteristics of a popular politician." – Aristophanes, about 400BC.