08/11/2005 - 21:00

Tim Treadgold: Briefcase - London listing lesson for St Barbara

08/11/2005 - 21:00

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To list, or not to list? That is the question facing Australian resource company executives as they contemplate doing business in the capital of mining finance, London.

Last week, in an unusual insight into how to play the listing game the British way, one Perth-born company did rather well; another flopped.

The winner was Chaco Resources, a business once known as Gold Mines of Sardinia (GMS) which, despite its previous name, was very much a Western Australian creation, complete with a head office in Nedlands.

The loser was West Perth-based St Barbara Mines, a company with a more colourful background than Chaco/GMS, and the new owner of the gold division of the failed Sons of Gwalia.

In both cases there is evidence of a strong revival under way. Chaco has shrugged off its past as a gold producer and explorer on the Italian island of Sardinia and gone oil exploring in South America.

St Barbara is also casting aside its complex history and re-emerging as a significant WA gold producer which is integrating the best bits of Sons of Gwalia with the remnants of St Barbara.

In Chaco’s case the game has involved a complete makeover, as can be seen by the change of name and change of commodity. A common link, however, is the continuing involvement of the irrepressible John Morris, who has seen almost as many booms (and busts) as Briefcase.

Disappointed as he was with the way the gold operation in Sardinia ended, largely a result of Italian political games, Mr Morris has played a key part in orchestrating the resurrection of GMS as Chaco, a name taken from a particularly wild part of South America, roughly where Paraguay bumps into Bolivia, and where a brief war was fought in the 1930s over rumours of rich oilfields.

Years of effort have gone into the metamorphosing of GMS into Chaco, which has a number of oil permits in Paraguay and, more importantly, in Colombia where a drilling program is scheduled to start in the next few months, and for which very high hopes are held.

London, which always has an eye on exotic investment opportunities, is warming to the reborn Chaco, lifting it from around two pence (five cents) in April to trades as high as 8.8p (22 cents), a 340 per cent gain in around seven months, no matter whether you look at price in pence or cents.

In late October, Mr Morris and the boys at Chaco even managed to tap the London market for a spare £5 million ($12.5 million) through a placement at 6p to help fund the oil drilling with the additional 84.7 million shares being absorbed easily and Chaco continuing to trade at a respectable 7.6p the last time Briefcase looked.

Meanwhile, over at St Barbara, London has been given the cold shoulder with new chief executive and highly-regarded geologist, Ed Eshuys, declaring a unilateral withdrawal of his company from the AIM market because it’s seen as being too expensive and because St Barbara has no current need to raise fresh capital.

To say London brokers and investors were miffed is an understatement. Despite Mr Eshuys having a good story to tell about re-building St Barbara they dumped the stock, triggering a slide in St Barbara’s share price from around 30 to 21 cents.

St Barbara has since recovered much of the lost ground, but the experience is laced with lessons for anyone contemplating how to deal with the money men of London, and the first is to recognise that they have much deeper pockets than their Australian colleagues, and a much greater choice of investments.

The second lesson is that London demands deference. It will tolerate aggressive business dealings, and ambitious chief executives, but it will not tolerate being ignored, or dismissed as being too far away, or too expensive.

And, on that final point of cost, just what has it really cost St Barbara to quit London? The answer is a few hundred thousand dollars in fees and charges, but when measured by, say, a five cent cut in the company’s share price, around $28 million in lost market capitalisation.

Mr Eshuys, correctly, can argue that the market capitalisation will return as investors take a look at the good work he’s doing with the old Sons of Gwalia assets. Briefcase would retort that the withdrawal from the world’s deepest mining finance market was a price that need not have been paid.

•••

Is the engineered investment game over? That’s another question which has a few company executives thinking deeply, including the crew at Alinta Infrastructure, which must have been watching with a mix of fascination and horror as the share price of their brand new corporate vehicle slipped below the waterline.

For three days up to October 31, Alinta Infrastructure closed under $2, with the low point of $1.96 set on October 28 representing a fall of 19 per cent from the high of $2.42 set just three weeks earlier when some people were terribly excited about the Alinta spin-off.

Needless to say, Briefcase was not excited about the new business because it holds serious reservations about the engineered investment concept where a pile of freshly-acquired assets are suddenly revalued and sold to the public at a dramatically higher price.

In the case of Alinta Infrastructure this involved the Duke Energy assets bought by Alinta for $1.7 billion in April last year and sold into its Infrastructure spin-off for around $2 billion just 18 months later. On top of the one-off profit flowing to Alinta there are ongoing management and incentive fees.

The point being made by Briefcase is that the winner in this engineered investment game, invented and perfected by Macquarie Bank, is the asset seller, not the buyer – a point the market seems to now be acknowledging with the slide in the Alinta Infrastructure share price and, of equal interest, the slide in the share price of another engineered investment player, Babcock & Brown, which has slipped from $21.47 in early October to recent sales around $17.70.

•••

“A critic is a legless man who teaches running.”

–        Channing Pollock.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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