miner excursions find investor favour
AFTER 10 years of exploring in Australia, the boss of mining company Terramin, Kevin Moriarty, is close to pressing the button on a mining project, a zinc development in South Australia. But the big project he believes will "make" his company lies half way around the world in Algeria. Years ago Moriarty would have had trouble selling Algeria to a wary Australian investment community given its bloody 1992-2000 war against Islamic insurgents and until its 2004 election landslide, a government dependent on the military.
But "the horror, the horror" that so unhinges the character Kurtz marooned up the Congo River in Joseph Conrad's novel Heart of Darkness has now become "show me the money" for investors and governments.
"The Government (in Algeria) is desperate to get projects like this," Moriarty says.
At Oued Amizour, near the Mediterranean port of Bejaia, Terramin is earning a 65 per cent stake in a 30-million-tonne resource grading 5.5 per cent zinc.
A $US75 million ($103 million) underground mine could be in production by 2010 producing 100,000 tonnes of zinc-in-concentrate a year.
On the day of the Algeria deal in February, Terramin shares jumped 17 per cent to 82c. By last Thursday the stock had hit $1, courtesy of zinc prices hitting record highs.
Fortified by such high metal prices and the spectacular success of some mining juniors overseas, Australian investors are finally starting to ditch the habitual xenophobia that had previously forced Australian miners to more often tap pioneering investors in London and Toronto.
"Three years ago investors would be wary, but now they are more interested in the resource, the returns and the value in the project," Gallery Gold's former chief Hamish Bohannan says.
Bohannan is now second-in-command at Toronto-based IAMGold, which, with four mines in Mali, merged with Gallery earlier this year.
"There is a greater appreciation of the risks involved and the world is becoming a smaller place," a mining analyst at Fat Prophets in Sydney, Gavin Wendt, says. "So the money is there now when before the investors just weren't there."
The global commodity price boom, inspired by China's surging mineral demand and a lack of new mine developments, has miners and investors scrambling for new projects, no mater where they may be. For Australian miners, the opportunities in Africa and Asia that were once thought off-limits for investors are now increasingly where the action is.
In a world where all the easily exploited deposits in developed countries have been found or lie under national parks or towns, mining executives and their bankers are realising they have no choice but to go "bush" to where the new deposits are.
"The prospectivity in Africa and South America is huge compared with Australia," Bohannan says. At the same time, he says governments in developing countries are becoming more welcoming of miners and mining laws are being adhered to rather than chopped and changed. "Constitutions are being more absolute."
Even the large, traditionally risk averse miners are making expensive bets on projects in out-of-the-way areas. Rio Tinto, the world's largest miner, this week was granted a mining concession for the development of a multi-billion dollar iron ore project in a mountain range in the middle of strife-prone West Africa, hundreds of kilometres from the coast with no rail infrastructure to speak of. Rio is expected to spend $US100 million just assessing the Simandou project.
But the small juniors are finding they are particularly welcome in developing countries. For governments, the priority is to develop projects and that is more likely when the project is the main focus of the mining company, not one of many projects competing for capital. Certainly, that was a major factor behind Terramin's success in securing Oued Amizour ahead of interest from bigger players such as Swiss-based global miner Xstrata. "The Government wanted someone who would make it their chief project, and it is a company maker for Terramin," Moriarty says.
Another driver for miners going offshore is costs. Around the world, mining budgets are being blown out by high oil prices and equipment and skills shortages. These shortages are particularly acute in Australia. But in developing countries costs, particularly for labour, can be much lower.
According to Moriarty, a truck driver at a mine in Algeria will cost you about $8300 a year, compared with more than $75,000 in Australia. And this is if you can find one.
While in Australia miners are paying around $1.30 a litre for diesel fuel, in petroleum-rich Algeria diesel goes for just 14c.
But while investors are now more comfortable tolerating higher political risk, the risks are still there.
Rio Tinto's still rotting copper mine on Papua New Guinea's Bougainville island is testament to what can go wrong. The mine was abandoned in 1989 as a secessionist movement on the island degenerated into conflict.
The difficulty of operating in unstable countries has been highlighted by the experience of Perth-based Anvil Mining in the Democratic Republic of Congo. In 2004 Anvil's Dikulushi copper and silver mine found itself caught in the cross fire of a rebel conflict. The DRC military commandeered vehicles, drivers and charter aircraft from the mine to transport troops to fight rebels, only for the troops to massacre about 100 villagers, including women and children. While no blame has been put on Anvil for the incident, threats of legal action last year were enough to hit confidence in its share price.
However, since then Anvil has started up a second copper project in the country and is closing in on a decision on a third development. At the same time, its share price has trebled.
More recently, Perth-based Moto Gold Mines has experienced the sharp end of investor sentiment, when just the whiff of uncertainty can unsettle the market. Moto shares had been riding high on the back of its gold project, also in the DRC, where it is earning a 60 per cent stake in an indicated resource of 3.7 million ounces. But its shares went into a tailspin this month when the CEO of its joint venture partner, OKIMO, the DRC's Office of Mines, commented that it was in dispute with Moto over talks to simplify their joint venture arrangements.
The comments immediately raised fears that the Government was set to move the goal posts on the project agreement and take a bigger share from Moto. As the gold price pushed through a record $US600 an ounce, Moto shares slumped almost 30 per cent in just over a week.
Moto says is has the full backing of the ministry, which it says has told OKIMO it can't unilaterally change or cancel its agreements. Moto chairman Sir Samuel Jonah, who is also executive president of global miner AngloGold Ashanti, has flown to the DRC to meet ministry officials.
"The ministry is telling us there is no problem there," Moto chief executive Klaus Eckhof says. But he accepts that the share price reaction comes with the territory.
For Eckhof it is a trade off between Africa's high prospectivity and higher political risk. But as he says, the political risk can be managed, but you can't magically manage a deposit out of barren ground.
"If you explore in Australia you have 80-90 per cent exploration risk (but in Africa) there is zero exploration risk," he says. "But there are political risks."
TZN Price at posting:
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