update, page-9

re: continued... CASH has always been king in Dryblower's guidebook to the better things in life. But after a month of heavy share price falls on the stock market, he suspects that quite a few other people are discovering just how important cash is when it comes to doing business.


It's at times like this, when the market corrects after a glorious four-year upward run, that everyone starts to look around at who's got the cash, who needs cash and of particular interest, who's trying to raise the stuff.

On the first point, there are obvious winners and losers. Those with it are the companies already in production. They're doing rather well and will continue to do so because even though metal prices have contracted, they're still at a very profitable level.

Perhaps a few million will get sliced off the profits of BHP Billiton and Rio Tinto – to which Dryblower says "so what" – profit levels remain impressive and, in the case of iron ore, continue to rise.

Investment advice is not part of Mr Blower's brief but right now is an interesting time to compare just how far the share price of some companies have fallen, and compare that with cash flow and profit projections. The word bargain might even slip into the conversation with your broker.

That, however, is the good news. A more difficult time will be faced by those companies and promoters seeking cash for new projects or cash to fill a float.

The float game in particular could well see a little bit of rapid re-pricing because there are quite a few investors, the people who traditionally support new mining companies, who are feeling rather burned after watching their portfolio of explorers drop by up to 30% in value over the past 20 trading days.

Once again, no names will be used (to protect the innocent) but it really is worth a visit to a list of proposed new floats, asking the question "what chance have they got of getting off the ground now".

Then there are the unfortunate chaps in the middle of a big fundraising for a major new project. This is where the real damage is being done because not only has everyone with cash suddenly become very mindful of hanging on to what they've got but it is also a time when they withdraw support from anything with a higher than average risk rating – or they simply charge more for the cash they provide.

If anyone doubts Dryblower's comment on the critical importance of cash, they need look no further than last Wednesday's announcement from Mount Gibson Iron, the small iron ore exporter that can claim to have started the Mid-West iron revival in WA.

Rather than hang around hoping to raise a pile of debt and equity for a magnetite project, Mt Gibson took the cash, a cool $52.5 million, and passed the project to its Chinese partner, Shougang Group.

If ever there was case of a company cutting its cloth to fit the occasion, this was it. Rather than try and forge ahead with a project that might have been doable in a boom, Mt Gibson's hard-nosed management decided to take the cash and look for bargains elsewhere – a classic example of a bird in the hand being worth two in the bush.

If Mt Gibson is a good news story (for Mt Gibson shareholders), there is another aspect to the correction we had to have – share prices have retreated to a more realistic level, and the fundamentals of the China story remain intact.

Over time, perhaps after a six-month sabbatical, the fact that China has not disappeared and still wants to buy vast amounts of material from the mining world, then the market will shake off its current bout of selling.

Until that time arrives, however, it will be a case of looking closely at companies and their projects and asking nasty questions, such as who can survive a cash drought.