29/11/2005 - 21:00

Tim Treadgold: Briefcase - Time’s ticking on Shovelanna saga

29/11/2005 - 21:00

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Tim Treadgold: Briefcase - Time’s ticking on Shovelanna saga

In the future, probably closer to the year 2020 than today, there might be an iron ore mine on the Shovelanna tenement co-worked by a small company called Cazaly Resources. Then again, there is an equal chance that it will never happen.

It is the 50/50 nature of the outlook that makes Briefcase very wary of the speculative trading in the shares of Cazaly, the company which appears to have Rio Tinto on the run, and which now has BHP Billiton as a prospective joint venture partner at Shovelanna.

Over the past few months, as the saga of Rio Tinto’s botched attempt to renew its iron ore tenement has unfolded, Cazaly’s share price has risen five-fold, from around 30 cents to around $1.50, and perhaps a lot higher when this edition of WA Business News hits the streets.

Share traders, let’s be honest and not call them investors, are attracted by the sales spiel promoting Cazaly as the company to spot the fact that Rio Tinto had not properly applied for an extension of its hold on the Shovelanna prospect, might not have done much work on it for many years, and had therefore allowed it to lapse.

In theory, the Shovelanna prize is worth $10 billion, or more, if it contains the estimated 100 million to 200 million tonnes of iron ore – even if the ore is high in impurities such as phosphorous. The involvement of BHP Billiton presents an opportunity to blend the Shovelanna ore and achieve a saleable product.

But, having listened to the pro-Cazaly argument (and it is a strong one), there is another side to the story, which most people appear to be ignoring because of its lovely David versus Goliath nature.

The first test for investors, rather than the in-and-out day-traders, is time. How long does a reasonable man think it will take to ultimately resolve Shovelanna. A best guess from Briefcase is 10 years. Why? Because that’s roughly how long it took to resolve the famous Bronzewing South gold-claim pegging dispute, which ran from October 1992 to November 2002 – and even then was found to not contain commercial quantities of gold.

There is much more at stake at Shovelanna. This is not a case of a lone wolf prospector fighting a penny dreadful rock kicker, which was the Bronzewing South dispute when Mark Creasy did battle with Audax Resources.

This is Cazaly, backed by BHP Billiton (the world’s biggest miner) fighting Rio Tinto (the world’s second biggest miner), with the WA government possibly joined to the action, and with two of Australia’s richest people, Gina Rinehart and Michael Wright, standing in the background armed with a couple of large-bore Queen’s Counsel, because they own 50 per cent of Shovelanna and risk being the biggest losers of all.

While everyone who has followed the Shovelanna dispute has a good idea of Cazaly’s argument (Rio Tinto failed to renew, therefore the tenement lapses) there has been precious little space devoted to the counter argument – and there is one.

As Briefcase understands the situation, Rio Tinto did botch its paperwork in as much as it trusted a courier to deliver the renewal papers to the mining registrar in Marble Bar. The documents were picked up a week before renewal, but took 10 days to reach their destination.

Meanwhile, back in Perth, Rio Tinto paid the fee to renew the tenement. Apart from the utterly ridiculous system of paperwork going one way, and money another, how can the WA government not avoid being caught up in this mess if it has taken Rio Tinto’s cash for Shovelanna, but rejected the paperwork because it was three days late.

While share traders have been celebrating Cazaly’s apparent win, Rio Tinto has been quietly plotting its comeback. First step is an appeal to State Development Minister Alan Carpenter on special interest grounds. If Mr Carpenter’s troops have banked Rio Tinto’s cheque he must listen, and might even agree that Rio Tinto has a case – even if it is only strong enough for the minister to lever something else out of Rio Tinto, such as a bit of extra infrastructure spending or an enhanced program of spending on social issues in the Pilbara (perhaps a new school, or two).

If Mr Carpenter rejects Rio Tinto’s first move then its off to the Warden’s Court, then the Supreme Court, then the State Full Court, then the High Court, and back again. And while that’s happening, the Rinehart and Wright camps chime in with an action to defend their position – in the Supreme Court, then the Full Court, then the High Court.

Get the picture? Bronzewing South was a pup alongside Shovelanna and Briefcase reckons it’ll be six feet under before anyone turns a sod on the site.

•••

If Shovelanna is not sufficiently complex for you, try an argument about the size and shape of the wheels on the rolling stock used by BHP Billiton on its iron ore railway.

Why? Because that’s about to become very important in the case Andrew Forrest and his Fortescue Metals Group is running in his attempts to get access to the BHP Billiton railway system.

Last week, BHP Billiton boss Chip Goodyear tossed away a remark at a post-annual meeting media conference about the number of times the wheels are measured; from Briefcase’s feeble memory it was something like twice a day and involved 60,000 measurements.

The process of measuring is, we are told, critical to ensuring the safe and efficient operation of iron ore rail trains because if one is wrong the system risks falling apart.

What’s so important about that? Well, if Mr Forrest wins access to the rail network he will presumably be required to provide his own rolling stock and, presumably, guarantee to BHP Billiton that his wheels are the exact size and shape and will not damage the network.

It is detail like this that lies at the heart of BHP Billiton’s claim that its railway should not be treated as infrastructure open to every Tom, Dick and Andrew. It is part of an integrated system – part of a business process.

Now comes the killer question. How long will it take to prove (or disprove) the business process (width of wheels) argument, how many key measurements will be tossed up as examples of critical importance of precision in its business process, how many experts will be called, and through how many courts will this technical argument pass?

The answer, like that at Shovelanna, is years, and perhaps decades.

•••

“Time is a great teacher, but unfortunately it kills all its pupils.” Hector Berlioz

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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