03/05/2005 - 22:00

Tim Treadgold: Briefcase - Picking winners can be a risky business

03/05/2005 - 22:00

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Picking winners is a game played with gusto at Ascot on a Saturday afternoon, and on the stock market every day of the week.

Tim Treadgold: Briefcase - Picking winners can be a risky business

Picking winners is a game played with gusto at Ascot on a Saturday afternoon, and on the stock market every day of the week. It is not a game recommended for government, as Brian Burke discovered almost 20 years ago when he was premier and busy picking winners out of Western Australia’s crop of flamboyant 1980s entrepreneurs.

And it is not a game that the current government should be playing.

But how else can the Gallop Government’s position with Andrew Forrest and his multi-billion dollar iron ore dream be interpreted?

Last year, under the guidance of then State Development Minister, Clive Brown, the Government made it very clear that it would take sides with Forrest in his attempt to crack open the Pilbara iron ore industry. The mutual enemy was the duopoly of BHP Billiton and Rio Tinto.

At the time, a rushed State Agreement with Forrest’s Fortescue Metals Group was seen as a bit of clever politics. Who, after all, could not sympathise with a ‘David’, in the form of Forrest, declaring commercial war with a pair of resources ‘Goliaths’. After a bit of tuttutting the issue settled down and we all waited for Forrest to deliver.

Wow! He has delivered, though not what Briefcase or anyone else expected. Rather than proceeding smoothly to launch an iron ore project Forrest has run foul of his Chinese partners, been forced to concede under questioning from the Australian Stock Exchange that iron ore reserves are not really reserves, and admitted to the likelihood of a cost blow-out and construction delay.

Meanwhile, down at BHP Billiton and Rio Tinto, it’s business as usual with a string of project expansion moves revealed, new mines developed, railways expanded and additional port capacity being constructed.

Given the fact that one side appears to be sidelined (perhaps temporarily) while the other is getting on with investing up to $5 billion in the WA economy (BHP Billiton and Rio Tinto’s combined iron ore expenditure plans), it would be reasonable to expect a more even-handed approach than last year’s exercise in backing Forrest.

Not so, if the word reaching Briefcase is a guide.

A few weeks ago Rio Tinto flew in some of its heavyweight managers (in seniority, not girth) for a meeting with a Government minister. What a surprise when the minister cancelled at the last minute to attend a sports-related event – a decision that could easily be interpreted as a snub, presumably since Rio Tinto is perceived as a class enemy because of its anti-union stance.

The only reasonable explanation for what happened is that the Government is persisting with its game of playing favourites, while indulging in a spot of Mark Latham-style class warfare – a potentially deadly game, as Burke discovered, especially when tough times return (which they always do).

In the business of iron ore it is possible (Ascot odds: 10-to-1), to one day see Forrest delivering on his promises, but it is also highly likely that his project cost estimate of $1.8 billion has become something closer to $2.5 billion or $3 billion. That a promised 2006 start-up, will become 2007 (and perhaps much later). And, by the time anything happens, sanity will have returned to the world of commodity pricing, and Fortescue’s planned project may be surplus to requirements.

Inside the WA Government it is to be hoped that a lesson is learned before anyone indulges in another exercise in picking winners.

 It’s one thing to dislike big companies; even Briefcase finds them objectionable most of the time. But it’s a totally different thing to ignore the fact that they control the capital, they actually employ thousands of people (rather than promise to), they build new projects, and they dictate a lot of what happens in the real economy.

Gung-ho entrepreneurs are the fun part of business. They provide the headlines, they are long in the promises department and all too often short on delivery.

It is a good thing to encourage them as risk takers, but not at the expense of the real business creators, and not at the expense of the state’s reputation.

•••

Finding value in the stock market is a tricky business, especially as the long-prophesied downturn is upon us – and property prices are not far behind in the value crunch stakes.

So it is with a degree of trepidation that Briefcase gives a share tip, not that it’s a tip, ’cos they’re not allowed. However, at the risk of annoying the chaps at ASIC it is reasonable to ask what value Telstra today, and what value next year.

When Briefcase last looked, Telstra had slithered down to $4.89, heading for its 12-month low of $4.55. In terms of market conditions, where fear has replaced greed as the great driver, the decline of Telstra is easy to explain.

But roll forward a year and think of Telstra not as just another telephone company in a competitive market, but as a government agency marching boldly towards privatisation after the Federal Government gets control of the Senate.

The full sale of Telstra, if the political winds are being correctly understood, has shifted from an if to a when. Side issues include exactly what will be sold, how it will be sold, and how much will it be sold for.

Forget all that nonsense, and focus on Telstra without government control, and without the Opposition checking every move, as instructed by its union mates.

The picture then becomes somewhat clearer. Telstra is in exactly the same position as Commonwealth Bank before it was liberated, not to mention Commonwealth Serum Laboratories (CSL), Qantas and Alinta.

The politicians refuse to talk about what happens post-privatisation but Briefcase reckons we all know the how it works. Mass retrenchments, outsourcing, downsizing, and cost cutting, with a single-word motivating factor – profit (at all cost) – which translates into earnings-per-share, which becomes dividends, which becomes share price (in the same way that day follows night).

•••

“History teaches us that men and nations behave wisely once they have exhausted all other alternatives.” Abba Eban

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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