WA loses appeal for big offshore miners

Masked by the delay in plans to merge Barrick Gold and Newmont Mining to create a $33 billion global gold mining giant is another sign that Western Australia’s resources industry is losing its international investment appeal.

Rather than being part of a merged business, which would dominate the world’s gold industry, the Australian assets of Barrick and Newmont have been earmarked for dumping into a secondary business, which would be sold as quickly as possible.

That’s not going to happen in the short term because the merger is off, for now, but the message contained in the Barrick-Newmont merger proposal is that neither company is particularly keen to retain exposure to Australia, and that essentially means WA, where they have a number of big mines, including the jointly owned Kalgoorlie Superpit.

Creating a separate vehicle containing what management likes to call “non-core” assets is a favoured way of getting rid of poorly performing assets, or those which cannot meet the parent company’s performance hurdles such as return on capital invested.

While the details of what Barrick and Newmont were planning have not been revealed, it is likely they were looking at precisely the same method of quitting surplus assets as BHP Billiton, which is keen to get rid of its WA nickel business, along with some of its east coast coal mines.

Low metal prices are one reason why so many WA mining assets are being shuffled off into a category marked “sub-standard” or “non-core”, to use the more polite phrase, but two other factors have reduced the attraction of the state to international investors.

High domestic costs, of the sort which have stopped a number of oil and gas projects, are a significant issue when comparing WA with rival jurisdictions. The rising Australian dollar is another limiting factor.

Neither problem, high costs for labour and other services, nor the high dollar, will disappear overnight, which is why companies with an ability to compare profit margins available in Australia with those available elsewhere are opting to sell their Australian assets and re-allocate the capital to where it can generate greater profits.

BHP Billiton’s plan to float off assets, which management believes cannot meet future performance requirements, is expected to be ratified at the company’s next board meeting, clearing the way for an end-of-year float of a business already dubbed Billiton Mark II because many of the unwanted assets came with the merger of BHP and Billiton in 2001.

A new owner might be able to boost the performance of discarded assets, if they can be acquired at a low price and if there is a pool of fresh capital available to expand or modernise their operations.

That’s certainly the case with BHP Billiton’s nickel assets thanks to the recent rise in the nickel price, though any buyer would be wary of the future nickel price should Indonesia permit the resumption of exports of unprocessed ore.

Gold, which is the dominant focus of Newmont and Barrick, also faces problems of over-supply and under-demand, which is why the price has been falling for nearly three years and why it could continue to contract, all the way back to $US1,000 an ounce.

The prospect of a long-term decline in the gold price is probably the major reason why Barrick and Newmont started merger talks last year, with the aim being to generate cost-sharing synergies estimated to be as much as $US1 billion a year.

But, most of those synergies would come from North American assets, with little to gain in Australia, where the operations of both companies are struggling to generate acceptable financial returns thanks to the double-whammy of a falling US dollar gold price and a rising Australian dollar.

Financial pressure, especially from common shareholders on the registers of both Barrick and Newmont, will force management to restart merger talks.

But, what happens to the WA assets of both companies is uncertain, with a separate spin-off similar to that planned by BHP Billiton one possibility.

Outright sale of assets regarded as non-core, including the Superpit and Newmont’s Boddington mine will also be on the agenda, with Barrick already showing a willingness to quit WA, which is why it was a willing seller of its Plutonic, Kundana and Kanowna Belle mines to Northern Star Resources over the past six months.