24/07/2007 - 22:00

The fashionable art of selling

24/07/2007 - 22:00

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Selling assets has been a foreign concept during the boom. To do so was to risk missing the next upward leg in what has been a remarkable five years.

Selling assets has been a foreign concept during the boom. To do so was to risk missing the next upward leg in what has been a remarkable five years. But selling might become a bit more fashionable in the year ahead with even the biggest mining companies, including Rio Tinto, contemplating a garage sale of unwanted stuff.

So far, most interest in the potential asset sales of Rio Tinto as it buys Canada’s Alcan aluminium group has focused on the obvious, such as the Northparkes copper mine in NSW, in which Oxiana has declared an interest.

Briefcase has a few suggestions that are much closer to home, and which could do wonders for the top, and bottom, of Western Australia.

Highest on the agenda is the eastern portion of the Southdown iron ore deposit near Albany.

This long, thin, strip of magnetite ore has been sitting on the Rio Tinto asset register for decades. It has gone nowhere because it’s magnetite and expensive to process and would almost certainly be far less profitable than the company’s Pilbara haematite mines, and someone else owns the western part of the same geological structure.

That other owner is Grange Resources, which is trying to start a big magnetite operation at Southdown, exporting an upgraded product through the port of Albany to a pellet-making plant in Malaysia.

Grange reckons it has enough ore to develop Southdown. Perhaps it does. But if it could effectively double the size of its resource by snapping up the Rio Tinto half there is no doubt that its banks would be a lot happier.

Talks, as they say, are under way which could result in a deal on Southdown soon.

•••

At the top of WA there is an even more interesting asset waiting for a deal.

Rich deposits of bauxite were identified at Mitchell Plateau more than 30 years ago, first by Alcoa, which was looking to supplement its Darling Range mines, and then by its partner, Rio Tinto.

Lack of energy has hampered development plans, a particularly frustrating point as the giant gas pools of the Browse Basin lie just offshore. Marrying Browse gas with Mitchell Plateau bauxite has been a multi-decade dream.

Several events are pushing Mitchell Plateau back into the limelight: the need for Rio Tinto to raise a couple of spare billion dollars to pay for Alcan; pressure from the WA government for Rio Tinto (and Alcoa) to get on with it – or, in more legalistic terms ‘use it, or lose it’ in the same way Pechiney recently lost a bauxite asset in Queensland; the activity of a small explorer, United Minerals, which is exploring around Rio Tinto’s leases in joint venture with the big aluminium producer, Norsk Hydro; and the potential for the United/Norsk joint venture to suggest to the WA government that they’re ready to do something, perhaps adding, “wouldn’t it be nice if they had the Rio Tinto asset as well”.

This final suggestion is, of course, one that no-one likes to speak too loudly about lest it actually force government to do something about dormant resources that would benefit the taxpayers of WA if the current owner would be kind enough to undertake the long-promised development.

What’s changed? Well, until now, there hasn’t been a serious rival proposal put to the government. It might be soon, and that could speed up a Rio Tinto exit (for a fat price) from Mitchell Plateau.

•••

On the question of selling, it interests Briefcase that until very recently the concept of disposal has been a foreign one to most stockbrokers – until Goldman Sachs JBWere chopped the legs out from under Kimberley Diamond.

It was a stiffly-worded Goldman ‘sell’ note that triggered the planned sale of the Perth-based diamond producer to Gem Diamonds of London at around 70 cents a share.

But, and this is the key point from Briefcase, two questions are left unanswered.

First, will Gem actually be able to do a better job than Kimberley at the Ellendale diamond field given the pressures of (a) flat diamond prices, (b) rising costs, (c) the sharply higher Australian dollar, and (d) the skills shortage?

What makes Ellendale so very, very, interesting is that it is an ex-Rio Tinto asset it opted to not develop, partly because of some of the issues listed above.

The sale of Ellendale was only at the urging of Kimberley boss, Miles Kennedy, with the active encouragement of the WA government.

Flip that situation around and apply it to Mitchell Plateau and wonder whether a new owner there would do any better – or is Rio Tinto a better judge of long-term value than some smaller players in the resources game?

•••

While on the topic of Rio Tinto, diamonds, the dollar, and asset values – Briefcase thought it worth making a cheeky observation about the financial viability of the big Argyle diamond mine expansion.

No-one is telling Briefcase anything special but it’s hardly rocket science to imagine the dreadful damage being done to the financial spreadsheets of Argyle as management grapples with the same issues that have done so much damage to Ellendale and Kimberley.

In this case, perhaps it will not be so much a matter of Rio Tinto selling something as opting to not proceed, or to mothball an investment until financial conditions improve.

•••

Two final thoughts this week – one good, one appalling.

First, the annual Diggers & Dealers gabfest kicks off in Kalgoorlie in a few days’ time, and while there might be some concern that the price of nickel has fallen dramatically over the past three months, it is worth looking at the situation another way.

Yes, nickel has fallen from $US24 a pound in early May to around US$15.90/lb today. But that latest price is almost exactly where nickel was at this time last year when delegates to D&D gathered in Kalgoorlie, and is seven times higher than at the start of the boom.

Secondly, the price of gold is marginally higher than a year ago, but the flow of capital into gold mining ventures is accelerating as fears grow about the long-term outlook for the US dollar.

•••

Now for the appalling, and perhaps the highlight (or lowlight) in the hunt by Briefcase for signs that the boom has peaked.

One of those signs is the intangible of good taste, remembering that the last time WA got this far up a boom, conspicuous consumption in Perth became internationally notorious.

The new height of taste can be found at Nokia, the maker of mobile telephones. If you ask nicely the Nokia man might let you see (but not touch) his new 8800 Sirocco Gold.

Yes, it’s just a ‘phone’, and yes, it really is plated in 18-carat gold.

Why? Because it can be done, and because someone has more money than they know what to do with, and desperately want to be first with the latest gizmo.

Is this yet another straw in the wind that the peak is near?

•••

“Vanity is a mortgage that must be deducted from the value of a man.” Otto von Bismarck

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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