Five weeks after administrators took control of Sons of Gwalia, many people are still mystified by the sudden collapse of one of Australia’s best known mining companies. Mark Beyer reports.
Five weeks after administrators took control of Sons of Gwalia, many people are still mystified by the sudden collapse of one of Australia’s best known mining companies. Mark Beyer reports.
If Sons of Gwalia was a ‘run-of-the-mill’ company, its administrators would already have presented a report to creditors on its current financial condition and options for the future.
Instead, Ferrier Hodgson partners Garry Trevor, Andrew Love and Darren Weaver – the joint administrators – successfully obtained court approval to defer the next creditors meeting until December 19.
The delay says a lot about the complexity of the task facing the administrators, who took charge of Sons of Gwalia on August 29.
They are now running a company that, year after year, had emphasised its successful use of hedging to boost profits.
In its 2003 annual report – the latest available – Sons of Gwalia states that: “Gold hedging has been, and remains, a cornerstone of profitability” for the company.
“Over the past 20 years gold hedging has generated additional revenues of around $A630 million by realising a weighted average delivery price of $A650 per ounce compared to an average spot price of $A500 per ounce over the same period,” the report says.
This kind of trading activity does not come without a price.
Former managing director Peter Lalor noted as much back in 1996, when he presented a paper to the Australian Gold Conference titled ‘The Importance of Hedging’.
“Hedging is a balancing act which can have both negative and positive consequences and the reasons for hedging vary from large to small companies,” Mr Lalor said.
At its simplest level, hedging enables gold producers to lock in future prices. Instead of being exposed to a fluctuating commodity price, they can be certain about their future income.
Hedging can also be extremely complex, akin to speculation.
Investors in Sons of Gwalia, whose shares were collectively worth about $220 million on Friday 27 August, may have paid the ultimate price for its hedging activities.
By Monday August 30, their shares were most likely worth nothing.
The key to understanding this dramatic loss of shareholder value lies in the company being forced to ‘crystallise’ losses on its hedge book of more than $350 million.
The appointment of administrators followed a review of Sons of Gwalia’s operations that identified a “serious deterioration” in the status of its gold reserves and resources.
Specifically, the company received disappointing drilling results at its Marvel Loch project near Southern Cross, which it had earmarked as an underground mine with strong long-term potential.
The deterioration in gold reserves, in turn, raised concerns about the company’s ability to meet its hedge book contracts, which included commitments to deliver large volumes of gold at agreed prices in future years.
This constituted a material adverse change under its agreements with banks and other counterparties.
Sons of Gwalia proposed a ‘standstill agreement’ to allow a reorganisation of its affairs but this could not be achieved.
Twelve banks were involved, with Citigroup, Commonwealth, Macquarie, JP Morgan Chase, HSBC, and Dresdner believed to have the biggest exposures.
Ferrier Hodgson partner Andrew Love told WA Business News several banks either did not respond to the standstill proposal or sought changes to its terms and conditions.
However, WA Business News has separately confirmed that Citigroup, which is believed to have a total exposure of between $140 million and $150 million, was effectively the one bank blocking the standstill.
Two banks with a small exposure had also objected but Sons of Gwalia’s bilateral banks – the ANZ and Commonwealth – had been prepared to advance more cash so they could be bought out.
Another bank had not formally agreed to the standstill but was expected to fall into line.
Many of the hedge contracts that contributed to Sons of Gwalia’s demise were originally written in the mid to late 1990s, when Citigroup was one of about 25 banks chasing business in a fiercely competitive market.
Two people directly involved in putting together many of Sons of Gwalia’s hedge contracts – former finance director Eardley Ross-Adjie and former Citigroup dealer Laurie McGuirk – both moved on some time ago.
Sydney-based Mr McGuirk transferred out of gold hedging in 1999 and subsequently left Citigroup to enter the funds management industry, while Mr Ross-Adjie retired in 2000 after 18 years with the company.
Both men told WA Business News they signed standard confidentiality agreements when they left their jobs and were unable to comment on Sons of Gwalia.
However, it is clear that Sons of Gwalia was more actively involved in gold hedging, including complex products, than most other mining companies.
In its heyday in 1999, the company had a total of four million ounces of production hedged over a period of several years.
At June 30 1999, the marked-to-market value of the hedge book – its value at that point in time, based on prevailing conditions – was $330 million.
By June 2004 the hedge book had reduced to 3.1 million ounces, only slightly below the company’s most recent estimate (from October 2003) of gold reserves of 3.2 million ounces.
The company was working hard to reduce its hedge book even further.
“Every opportunity is taken to simplify, better match or reduce the level of committed cover,” the company says in its last quarterly report.
The incentive to restructure the hedge book was abundantly clear – its marked-to-market value at June 30 was negative $348 million.
While Sons of Gwalia was still trading, this was treated as a contingent liability.
But as soon as the banks blocked the standstill agreement, the company was forced to crystallise these losses.
Overnight, the company had lost its value and the new directors were forced to appoint administrators.
The latest report from the administrators says Sons of Gwalia had financier and counterparty debt of $490 million.
It also owed trade creditors $70 million, US note holders $235 million, employees $7 million and had rehabilitation bonds and guarantee facilities of $44 million.
With total debts of $862 million, the administrators are working to retrieve value from the company’s gold and tantalum assets.
For employees there is a reasonable prospect their jobs will continue, albeit under new ownership, but for investors there is little hope they will recover their money.
The big unknown remains how much money the banks, which sold the gold hedging contracts, will recover.
Sons of Gwalia
- Sons of Gwalia was a major gold producer and the world’s largest tantalum miner.
- The company had been operating for more than 20 years.
- Founders Chris and Peter Lalor retired in April 2004.
- Administrators took control of Sons of Gwalia on August 29.
- The new board was led by chairman Neil Hamilton and managing director John Leevers.
- The company’s total debts are estimated to be more than $860 million.
