03/08/2011 - 10:17

Wesfarmers, Woodside maintain their places amid sweeping market change

03/08/2011 - 10:17


Save articles for future reference.
Wesfarmers, Woodside maintain their places amid sweeping market change

WHEN WA Business News started its total shareholder return survey nearly a decade ago, the world was just emerging from the dot.com boom.

That was an era when investors had little interest in mining and resources stocks.

Instead, investors in Western Australia tipped their money into a diverse collection of companies.

The state’s largest listed companies at the time included grocery supplier Foodland, automotive parts producer Futuris, and biotechnology developer Chemeq.

Other ‘market leaders’ were BankWest, brick-and-tile maker Bristile, gaming company Burswood, and automated ticketing company ERG.

These companies have all subsequently been taken over, dismantled or failed, and in their place has emerged a raft of fast-growing mining stocks that now dominate the stock market in WA.

The magnitude of change over the past decade is highlighted by a close analysis of WA’s market leaders.

In 2003, more than half of the state’s top 30 companies – 16 to be precise – operated in areas outside the mining and resources sectors (see table). By 2007, that number had fallen to six companies, and currently, just four of the state’s top 30 companies have no direct exposure to mining and resources.

The flipside of this trend is the growing investor support for mining companies such as Fortescue Metals Group, Iluka Resources, Atlas Iron and Aquila Resources, which all rank among WA’s 10 largest stocks by market value.

Coming up behind them is a new generation of mining stocks, such as Coalspur Mines, Regis Resources and Sandfire Resources, which all have exciting growth plans.

The big two

Amidst all of this change, there have been a few relatively constant features.

One is the prominence of Woodside and Wesfarmers as the state’s two largest companies. But even among these companies there has been a lot of change in their market ranking and valuation.

In 2003, Wesfarmers was the state’s largest company, with a market valuation of $9.5 billion. That put it comfortably ahead of Woodside, which was valued at $8.2 billion.

By 2007, Woodside’s market value had soared nearly four-fold to $31 billion, giving it a market value almost double that of Wesfarmers.

Since then, Woodside’s market value has been static, while Wesfarmers has enjoyed a surge of investor support following its takeover of Coles Group in 2007.

Currently, they are almost on a par, with both having a market capitalisation of about $32 billion.

Apart from sharing a similar market cap and a Perth head office, the two companies could hardly be more different.

Woodside has a specialist focus on the liquefied natural gas (LNG) sector, which holds enormous growth potential, and many challenges.

Wesfarmers, by contrast, remains a rare beast in the Australian market – a true conglomerate, owning a diverse mix of businesses ranging from retail to coal mining, fertiliser production and insurance.

Iron ore miners

WA’s number three company, Fortescue Metals Group, was established almost exactly eight years ago, on July 18 2003.

On that day, company founder Andrew Forrest presented an ambitious plan to create a third force in the Pilbara iron ore industry, to take on the powerful incumbents Rio Tinto and BHP Billiton.

Many people were dismissive, but Mr Forrest has proved them wrong, riding the China boom to create a business that has never given up its focus on rapid growth. With a market value of about $20 billion, FMG has shot ahead of many long-established mining businesses.

Notably, it is one of four WA-focused iron miners among the state’s top dozen companies, along with Atlas Iron, Aquila Resources, and Mt Gibson Iron. That is up from none back in 2003.

International focus

Another notable trend is the large number of international miners among the state’s top companies.

More than a third of WA’s top 30 companies have international mining operations, including uranium miners Paladin Energy and Extract Resources in Africa, gold miners Medusa Mining and CGA Mining in the Philippines, shale gas developer Aurora Oil & Gas in the US, coal miner Coalspur in Canada, and iron ore miner Mirabela in Brazil.

This illustrates Perth’s role as an incubator of companies, ideas and expertise in the mining industry.

Where the state has struggled, in large part because of the lack of investment capital in Australia, is in building global leaders.

Equinox Minerals, for instance, was founded in Perth, subsequently listed on the Toronto Stock Exchange, and established copper mining operations in Zambia. It has recently been taken over by Barrick Gold Corp.

In addition, China’s Hanlong Mining Investment is targeting Sundance Resources, which is aiming to develop an iron ore project in Cameroon. 

Platinum miner Aquarius Platinum and copper miner Anvil Mining were established in Perth, but with their operations in Africa and their capital increasingly sourced from Europe and North America, they have little connection to their hometown.

Gone missing

The many companies that have disappeared from the WA ‘leader board’ fall into three broad categories.

Many have been taken over and absorbed into larger businesses. These include: Bankwest, which has been through several ownership changes and is currently owned by Commonwealth Bank; Foodland, which was bought by national grocery wholesaler Metcash; and Burswood, now part of Crown.

Bristile, Jubilee Mines, Hardman Resources, GRD, Abelle, Portman and ERG were also taken over.

Arguably the most spectacular takeover battle involved Alinta, which had grown from a small WA gas utility to a national energy business.

A heated takeover battle during 2007 resulted in investment group Babcock & Brown succeeding with an $8 billion offer, only for the entire debt-laden group to implode during the GFC.

Earlier this year, the core Alinta Energy business was sold to a consortium led by international private equity group TPG Capital.

A second category is those companies still operating and listed on the ASX, but whose valuation has slipped relative to other stocks.

Clough, Fleetwood Corporation, Austal, Schaffer Corporation and Emeco Holdings fall into this category.

A third category is the handful of market leaders that have blown up in spectacular fashion.

Biotech developer Chemeq, managed investment scheme promoter Great Southern and mining group Sons of Gwalia fall into this group.


Subscription Options