Running out of cash, Australian miners get creative to survive

Running out of cash, Australian miners get creative to survive

6:51pm EDT

By James Regan

SYDNEY (Reuters) – From pooling office space to paying bills with company stock, small and mid-sized Australian miners are finding new ways to stay afloat during one of the sector’s worst downturns. China’s slowdown has helped cool a decade-long commodities boom that pushed gold, copper, iron ore and coal prices to record highs, leaving Australian miners facing a painful transition to lower margins and weak investment interest. Only a year ago, with miners flush with cash and desperate to retain staff, six-figure salaries and executive-style perks for everyone from truck drivers to kitchen help were commonplace. Now, with traditional funding drying up, smaller miners are devising novel ways to keep from going broke. Unable to pay bills in cash, some are offering drill rig operators, caterers and even public relations firms company stock to keep them on the job – acts of desperation last seen at the height of the 2008-2009 financial crisis.“When this happens, the shares are often just dumped on the market, which destroys the share price,” said Peter Strachan of Stock Analysis, an Australian research company focused on smaller miners.

Gold miners have been among the hardest hit and if conditions persist Australia’s ranking as the world’s second-biggest producer after China could be under threat.

A consultant said he was offered stock by a gold miner which only a year ago was making plenty of money.

“The miner said it was the only way to keep some cash in the bank and pay for ongoing services at the mine and the head office,” added the consultant, who rebuffed the offer


Some miners have managed to raise money via heavily discounted share offerings, which may buy time but threaten to leave them in worse shape once the money is spent.

Gold miner Crest Minerals (CTT.AX: QuoteProfileResearchStock Buzz) last week launched a rights issue at half the average share price of the past 30 days to raise A$2.2 million for exploration work.

“The equity and debt markets have essentially closed and we are advising clients to explore every other means possible for capital until this market turns,” said Darren Weaver, a partner with Australia’s biggest corporate receiver Ferrier Hodgson.

To cut overheads in the once-booming mining city of Perth, junior miners are sharing office space, slashing executive wages and teaming up with private equity investors, one of the few sources for capital still open.

“Private equity will typically wait until they think the market is at the bottom and only then come in,” said RBC Capital Markets analyst Rob Sennitt.

Until now, small miners have relied largely on equity markets to fund mines or exploration to locate new deposits, with over 400 new junior resource floats in the last five years.

But 75 percent of Australian mining IPOs since 2008 are trading below their issue price and investors have lost on average 30 percent of their money in mining IPOs over the period, according to data from the trade group Australia Mining.

IPOs in 2010 and 2011 are trading more than 50 percent below their listing price.

Celsius Coal (CLA.AX: QuoteProfileResearchStock Buzz) obtained $10 million from private equity firm Blumont Group Ltd in Singapore in February via a share and convertible notes placement to further plans to mine steel making-grade coal in the Kyrgyz Republic.

“They just ask how much money you need. If they like the project: done,” said Celsius Managing Director Alex Molyeneux.

Not everyone is so lucky.

After a heavily discounted A$65 million rights issue in February to address debt, Tanami Gold (TAM.AX:QuoteProfileResearchStock Buzz) was forced to idle its only operating mine following last month’s 7.6 percent fall in the gold price.

Another outback gold miner, Saracen Minerals (SAR.AX: QuoteProfileResearchStock Buzz), has cut the fees it pays three non-executive directors by 20 percent, suspended work on a new mine, halved its truck fleet and promised a review of the managing director’s salary.


“Good project or bad project, it doesn’t matter, there’s no money out there, things just keep getting worse,” said Ross Smyth-Kirk, chairman of Kingsgate Consolidated (KCN.AX: QuoteProfileResearchStock Buzz), which mines gold in Thailand and Australia and is exploring in Chile.

Smyth-Kirk, who has watched his firm’s shares slump to as low as $1.43 from above A$5 in the past year, is now considering a stock listing of Kingsgate’s Thai subsidiary Akara Mining Ltd on the Thai stock exchange to boost liquidity.

Companies supplying services at mine sites and front offices are also feeling the pinch.

Many Perth-based mining consultants and other support services are now operating on four-day weeks, according to Strachan of Stock Analysis

Graeme Hunt, chief executive of Transfield Services (TSE.AX: QuoteProfileResearchStock Buzz), said the service firm’s 20 to 30 drilling rigs used for mining exploration have gone from 80 percent utilization to under 10 percent.

“There are a growing number of companies that don’t have any other choice but to hibernate until this storm passes,” said Keith Goode, director of Eagle Mining Research.

Some miners are simply offering themselves to the highest bidder.

Copper miner Discovery Metals Ltd (DML.AX: QuoteProfileResearchStock Buzz) put itself up for sale after failing to push through a capital raising. Its largest shareholder, Chinese private equity firm Cathay Fortune, is now willing to pay A$0.35-A$0.40 a share for the company, a fraction of the A$1.70 a share offer it made in November.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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