19/11/2009 - 00:00

Too much optimism is risky business

19/11/2009 - 00:00


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The right choice of words is important when talking up a mining project.

KARL Simich, the man behind tearaway stock market success, Sandfire Resources, has reason to wonder why he cannot be as enthusiastic about an exploration project as Australia’s Resources Minister Martin Ferguson.

Earlier this month, Mr Simich was forced by the Australian Securities Exchange to “retract” part of a presentation dealing with Sandfire’s Doolgunna copper discovery near Meekatharra.

What annoyed the ASX were two paragraphs alongside a drawing of a possible development, which talked about a potential 1 million to 1.5 million tonnes-a-year mine development at Doolgunna, and that the mineralisation pointed to “attractive economics”.

The day after Sandfire altered its presentation by removing the paragraphs, which the ASX said breached the Joint Ore Reserves Committee code of mineral exploration reporting, Mr Ferguson made an equally optimistic statement on the future for renewable energy projects.

The minister’s enthusiasm bubbled over when announcing the allocation of $235 million in grants for projects moving into the commercial phase of their development, including $152.7 million for two geothermal projects.

In what might also have caught the eye of the JORC committee, if geothermal exploration was covered by the code, Mr Ferguson said the government money: “will deliver approximately $810 million in renewable energy investments” … and “it will deliver almost 80 megawatts of new renewable generation from wave technology, geothermal sources” … and other alternative sources of power.

What Bystander, and a few other people, noticed was the use of the word ‘will’, rather than a more cautious term, because geothermal is actually a far more uncertain commercial prospect than copper at Doolgunna.

Mr Simich might have hurdles to clear before he develops a mine, but they are nothing more than speed bumps compared with the technological challenges of extracting geothermal energy from five kilometres underground; that is, assuming the hot water and steam cycle that looks so good on paper can ever be made to work.

It would be going too far to say that, if Mr Simich copped an ASX query, then Mr Ferguson should have too.

Unfortunately, the minister is not a listed company, the JORC code doesn’t cover geothermal exploration, and no government agency would have the nerve to nit-pick whether Mr Ferguson should have used the “if” word rather than “will” especially at a time when ‘green’ energy is so politically popular.

Geodynamics was not as lucky as Mr Ferguson. After it was named as the recipient of $90 million in government grants, it did receive a query from the ASX, which was curious about a run up from 83 cents to 92 cents on the day before the grants were announced.

Meanwhile, back at Sandfire the ASX’s best endeavours to pour cold water on Mr Simich have not put out the fire in the company’s share price.

Despite the removal of the offending paragraphs, which can still be found on the ASX’s own website (go to the November 2 report and compare it with the sanitised November 5 version if you’re curious), Sandfire’s shares have continued running, up from $3.50 on the day of the retraction to recent trades around $4.03.

What humours Bystander is whether that 15 per cent price rise in less than a week was aided (or hampered) by the ASX’s nitpicking.

Glass half full

OPTIMISM, especially in Australia, that the world is rapidly emerging from its biggest economic scare since the Great Depression continues to sit oddly with the alarming data flowing out of the US.

Two graphs compiled by the Canadian investment bank, Gluskin Sheff, reveal the depth to which the US has sunk.

The first shows true unemployment (and under-employment) of close to 17.5 per cent, not the 10 per cent used in headlines. The second shows the cliff face of the collapse in US consumer credit. Interpreted, the US is in a job and credit creation nightmare with recovery years, not months, into the future.

Dismissed by its critics as irrelevant in ‘Asia’s century’ the US still represents close to 30 per cent of the global economy, and it controls the currency of trade, which continues to decline, and other currencies, including gold.

In time, the falling US dollar will ignite an American export boom which will spark recovery, but until then the world will struggle on 70 per cent power, a bit like a six-cylinder car running on five, which makes for a rough ride.

Back to the future

IF not everyone believes the comment (above) about gold being a currency, then take a look at the latest offerings from investment firms.

Forex.com, one of the new breed of companies inviting clients to trade in foreign currencies, has just added gold to its inventory.

The four “currencies” available for a dash of high-risk gambling (sorry, investing) are the euro, yen, US dollar, and gold.

No need to fire up the De Lorean for a trip back to the future. It’s here already.

A safe bet

IT’S not every day that Australia can claim a financial win over the gnomes of Zurich, but a recent list of risky countries puts us ahead of Switzerland.

Compiled by London-based CMA DataVision, the risk list estimates the chances of a sovereign debt default by 63 countries using credit default swaps as a guide.

Australia is ranked eighth safest on the list with a 2.7 per cent chance of defaulting on its debts. Switzerland is ninth at 2.9 per cent.

Least risky country is Norway (a 1.3 per cent chance of default). Followed by Finland (1.5 per cent), the US (1.8 per cent), and Germany (also 1.8 per cent).

The UK is 13th at 3.8 per cent, one spot higher than Chile (3.7 per cent), which is somewhat insulting, but nothing like Argentina which, at 61st, is rated a 47.2 per cent chance of default, Venezuela, at 62nd and a 50.3 per cent chance, or the worst of all, Ukraine with a 50.5 per cent chance of default.

A course, of course

INTERESTINGLY, Oxford University is offering four speciality finance courses next year, including a diploma in financial strategy, finance for executives, and international investment. Shame that sort of stuff wasn’t being taught before last year’s crash – or was it?


“You can’t build up a reputation on what you are going to do.”

Henry Ford




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