The article: 1) questions the logic of building "a greenfields mineral processing plant"; 2) questions the costs incurred to date (ie: closer to $150m than to $130m); 3) queries MSC's change in strategic marketing direction over the last 12 -18 months; 4) notes the over-abundance of capital raisixngs over the last 12 months; 5) points out that further delays in the commissioning of the processing plant have now occurred (ie: now set back to cy02h2; 6) queries the level of potassium being found in the orebodies being dug out 7) questions the extent to which sample ore has been processed over recent times; and 8) overall, is generally downbeat about MSC at this time.
A full copy of the article is as follows:
About the bravest thing anyone can do in Australia is to erect a greenfields mineral processing plant. They cost zillions of dollars; they take years to build; they blow up; the state-of-the-art process that was perfected in the laboratory mysteriously won't work in the field; and the plants never, ever run right the first time you press the button.
Pierpont strongly recommends that anyone who is planning to build or, worse, finance a processing plant should first order a container of Bollinger to buoy him through the horrors ahead. The Bolly will cost a few dollars, but it will be a flyspeck compared with what will be spent on the plant.
The outback is littered with examples, the most notorious being BHP's hot-briquetted iron white elephant outside Port Hedland and Anaconda Nickel's Murrin Murrin near Kalgoorlie. But Minerals Corporation's Skardon River kaolin plant deserves an honourable mention.
The amount spent on Skardon River to date has been about $130 million and Minerals Corp probably won't have much change left out of $150 million by the time it's finished - hoping, indeed, that it will be finished. The company is now at the tail-end of a $15 million convertible note raising for precisely that purpose.
As many of Pierpont's readers may never have heard of either kaolin or Skardon River, your correspondent should perhaps fill in a bit of background.
Kaolin is an industrial clay. In processed form it looks like talcum powder, and the brightest, finest kaolin commands the highest prices, selling for up to $US550 ($962) a tonne as a filler for fine papers. It's one of the few minerals to enjoy rising prices recently, having kicked up by 17 per cent in the past year.
Skardon River is one of Australia's most remote locations, 137 kilometres north of Weipa on the western coast of Cape York. The big kaolin deposit there was originally held by Australian Kaolin Ltd, which was going to build a big plant to produce 175,000 tonnes of kaolin a year at a cost of $54 million. The company also said it was going to sell premium brightness and ultrafine grades under agreements with Europe, Africa, the Middle East, Japan, China, the United States and Taiwan.
After spending $100 million on the Skardon River plant, Australian Kaolin went into receivership, wiping out large investments by - among others - Ralph Sarich, Mark Creasy and Sons of Gwalia. Worse, the plant still wasn't operational, with some heavy-duty problems in the dry circuit.
Two years ago, a bright lad named Vic Alexander spotted a bargain and picked up the project for $6.5 million plus some royalties. Vic's Minerals Corporation took over the project.
In the two years since then, Minerals Corporation may have won the title for the most capital raisings in Australia. By Pierpont's count, it has had a total of 16 share placements and option exercises in 24 months to raise a total of $15.5 million. Recently it raised another $11.3 million in a convertible note issue. The convertible note issue has been extended to raise a final $3.7 million and is due to close on June 28.
All this money is being poured into Skardon River. Vic is sunnily optimistic about the project. He says the wet-circuit section of the plant has been commissioned and the dry circuit was successfully tested in April. The note prospectus says the plant is expected to enter full commissioning in the next half year.
Pierpont was overjoyed to read all this, because he has been looking forward to the opening of Skardon River for the past two years.
Pierpont has written a couple of previous columns on the project, which were so appreciated by the chaps at Skardon River that they adopted a local crocodile as a mascot and named it Pierpont.
All jolly good, but this Pierpont has not yet packed his toothbrush for the opening because he fears there may still be a problem or two. Skardon River seems to be one of those projects that is always going to start and never does.
The gossip around the Croesus Club is that Skardon River still faces no shortage of obstacles. The rumours were that the orebody contained potassium at five times the level of rival deposits in Georgia, United States; that the commissioning run on the plant was very short and that it needed degritting equipment; that the plant had not produced satisfactory samples for potential buyers; and that the Asian ceramics market, which was being targeted by the company, would not consume the volume needed to justify the plant cost.
Vic assured Pierpont that potassium levels in the kaolin were very low.
The plant would not be officially commissioned until later in the year.
PIERPONT, FROM 30 NOVEMBER, 2001 (UNDER, TOPICAL MATTERS):
Topical Matters
Judging by the prospectus, the company must have overcome the various difficulties it inherited when it took over the project. The difficulties were of no small order. Mineral Corporation"s predecessor at Skardon River was Austrlaian Kaolin which blew $100 million without getting the project operational. For background, readers are referred to Pierpont"s columns of February 4, 2000 and January 19, 2001.
PIERPONT FROM 4 FEBRUARY 2000:
Aust Kaolin hits the Bermuda Triangle
A disgruntled shareholder wrote to Pierpont the other day. Mind you, Pierpont rarely hears from gruntled shareholders, who are too happy watching their bankrolls grow to bother writing letters.
Anyhow, this chap was frightfully disgruntled because he had bought shares in Australian Kaolin and it had vanished from human ken.
``The stock was suspended earlier this year after it had apparently lost support from its bank,'' he wrote. ``Information is near impossible to get, with no communication to shareholders for six months and inquiries to the stock exchange referred to the receiver and inquiries there referred back to the stock exchange. Is this a loophole in the exchange rules that only creditors get to know what is happening and not shareholders?''
The short answer is yes. The receiver is appointed on behalf of creditors. He reports to them only and has no duty to shareholders.
Shareholders can (with some difficulty and expense) access statements made by their company to the ASX, but companies that have just sunk don't make many announcements and some make none at all. So companies that go bust disappear from shareholders' view as completely as if they'd hit the Bermuda Triangle.
Actually, it's easier to explain the disappearing aircraft of the Bermuda Triangle (most of which didn't disappear at all) than the reasons for Australian Kaolin vanishing from the radar screen.
For the benefit of readers fortunate enough never to have heard of the stuff, kaolin is an industrial mineral. In processed form, it looks like talcum powder and the brightest kaolin commands the highest prices. High-quality kaolin sells for about $US200 ($315) a tonne and is used as a coating for fine papers, while lower-quality kaolin is used as filler.
Australian Kaolin had a big deposit at Skardon River on the west coast of Cape York, 85 kilometres north of Weipa. It was going to build a big plant, which would produce 175,000 tonnes of kaolin a year. Australian Kaolin said it was going to produce the premium brightness and ultrafine grades and had reached exclusive distribution agreements for Europe, Africa, the Middle East, Japan, China, the United States and Taiwan.
Investors loved the story. Australian Kaolin raised the not inconsiderable sum of $53.9 million in mid-1997 in a placement and rights issue at 30¢. Two shareholders who came aboard around that time were Ralph Sarich and that legendary prospector Mark Creasy.
Australian Kaolin then arranged financing of a further $20 million from Dresdner Kleinwort Benson. Shareholders attending the 1997 annual meeting were told the company was in ``a very strong financial position''. Construction had begun on the Skardon River plant, which was supposed to be completed in mid-1998.
All jolly well, but by the end of 1997 the share price had slipped to 25¢. By June 1998, the shares were down to 15¢ and the plant still wasn't completed. Sons of Gwalia, which has a strong presence in industrial minerals, thought it saw a bargain and spent $5 million picking up 15 per cent of Australian Kaolin in a market raid.
It turned out to be one of those bargains you'd prefer to miss. The subsequent events are in some dispute, but broadly Australian Kaolin ran out of money, with its plant still not commissioned. Australian Kaolin tried to get more money out of Dresdner, which asked for reports on the financial, engineering and marketing prospects of the company.
The financial report, by Perth accountants Taylor Woodings, said the project was facing cash-flow problems. The directors disputed that. The directors also threatened to sue Dresdner when it refused to provide further finance after reading the report.
Australian Kaolin shares kept right on sinking and hit the wall last March, when Tony Douglas-Brown was appointed administrator and Tony Wooding and Michael Ryan were appointed receivers. The shares are suspended and for all the information that has been given to shareholders, the company might as well be deep under Atlantic waters somewhere off Bermuda.
One point that is immediately apparent is that the project cost much more than Australian Kaolin had budgeted. The original price on the Skardon River project was some $61 million, of which the plant was expected to cost $47 million. This blew out by an extra few million when the $A slumped against the $US in August 1998 an event obviously beyond the board's control.
However, by the time the receiver was appointed, the $73 million Australian Kaolin had raised in 1997 was gone and creditors were owed another $10 million. After spending some $83 million, the company had run out of money. Expenditure on the Skardon River processing plant had blown out to $67 million and it still wasn't commissioned.
All new mineral projects are liable to teething problems, but Skardon River seems to have had more than its share, particularly the plant. Tony Douglas-Brown's report to creditors says one problem was in the calciner the kiln that cooks the kaolin.
Instead of letting the contract for the calciner on a turnkey basis, the directors split the contract between two or more contractors. There was a problem with the welding and some bricks in the kiln had come loose. There was a dispute over who was liable.
Another problem was the failure of some nozzles in the spray dryer. As the suppliers of both the spray dryer and the kiln had not been paid, they were refusing to fix the problems.
Another issue was the lack of working capital. Sons of Gwalia's managing director Peter Lalor told Pierpont: ``It's not like gold that you can take down the road and get a cheque for, or even sell overnight. With industrial minerals, you have to produce samples and see if they meet the buyer's specifications. You take them to customers, you argue about the price and three months later you deliver and three months after that you get paid.''
So Australian Kaolin needed working capital to carry it across the long gap between cranking the plant into production and eventually getting paid. Working capital for Skardon River was supposed to be $10 million and that was the amount Dresdner finally refused to provide because it didn't consider the project viable.
The original budget was probably ambitious in both cost and time. Skardon River is on one of the most remote bits of Australia and construction was disrupted by an unduly wet season (incidentally, the wet season means it can be mined for only 10 months a year).
After mining, the ore was to be put through a wet plant that would separate the kaolin from the bits of earth and other impurities. It would then go 18 kilometres down a slurry pipeline to a dry plant, which would convert it into fine, dry white powder. Then it would be bagged and shipped by barge to a store at Weipa.
The wet plant was completed but not the dry plant. The cash appears to have run out before adequate storage facilities could be built. Tony Douglas-Brown says the plant was supposed to produce about 450 tonnes a day, but there was only storage for 200 tonnes at Skardon River and the store it needed at Weipa wasn't available.
Peter reckoned a kaolin plant could take a couple of years running before the management could be confident of the quality and specifications of the product and even the yield (recovery grade). The clay being mined contained 92 per cent kaolin, but how much of it would be recovered in the plant was questionable.
At the end of the day, the only way of finding out was to build the plant and run it. Anyone who feels like doing this will soon get the opportunity, because the receivers have said they intend to auction the plant.
So if anyone wants to spend a lazy $20 million finding out all about kaolin, here's their chance. It sounds like the ideal project for Ralph Sarich. Or he could just send the money to the Bermuda Triangle.
PIERPONT, FROM 19 JANUARY 2001:
Bargain hunting in crocodile country
January is the month that sees Mrs Pierpont at her happiest, because it's when the boutiques hold their sales. She reckons she has so far spent $75,000 on dresses, shoes and handbags for a saving of $50,000. If she saves much more money, Blue Sky Mines will have to have a rights issue to cover the costs.
But even at her canniest, Mrs Pierpont could never have got a bargain as good as Minerals Corporation did when it bought the Skardon River kaolin deposit from the shell of Australian Kaolin Ltd.
Skardon River is on the western coast of Cape York about 100 kilometres south of the Torres Strait. Skardon River is therefore seriously remote. There are no roads there, so it is accessible only by plane or boat. And if the boat runs aground on the mud flats, Pierpont's advice is to let someone else jump out first and start pushing, because the crocodiles here are proven non-vegetarians.
Pierpont is amazed any prospector survived at Skardon River long enough to find kaolin, a fine clay which is used in the paper industry. In processed form it looks like talcum powder. The brightest kaolin commands the highest prices and is used as a coating for fine papers, while the lower quality stuff is used as filler.
Enthusiasm for the project was high at first. In 1997 Australian Kaolin made a placement and rights issue at 30¢ to raise the not inconsiderable sum of $54 million. Most of the money was raised in WA, with Ralph Sarich and Mark Creasy taking shares.
Dresdner Kleinwort Benson lent the company another $20 million, work began on the Skardon River plant which was expected to be completed in mid-1998 and the company forecast production of 175,000 tonnes of kaolin a year. Everything looked terrific.
Except that the shares began sliding. Stories began circulating that the plant was having problems and the company was running low on cash. In March 1999 the shares were suspended from trading, Perth's Tony Douglas-Brown was appointed as administrator and Tony Wooding and Michael Ryan were appointed as receivers.
As usually happens when a company bites the dust, shareholders have been left with zilch information, except for a column which Pierpont quilled a year ago. There is some dispute over the causes of the disaster.
One point which is clear is that Australian Kaolin needed more funds to complete the project. Before the crash, Dresdner commissioned the Perth firm Taylor Woodings for a report. Taylor Woodings reported that the project was facing cashflow problems. The directors disputed that. The directors also believed that the company could sue Dresdner for refusing to provide more finance.
Whatever the merits of the directors' complaints about Dresdner, it seems to Pierpont the main cause of the failure was that the Skardon River project ran seriously over budget. In the rights issue prospectus of May 1997, Australian Kaolin reckoned the total project cost at $61.1 million, of which $47 million was for construction of the processing plant.
The administrator's report to creditors shows that by February 1999, the total cost had risen to $85.5 million, of which the plant was $67.5 million.
Some of the cost blow-out was due to factors beyond Australian Kaolin's control, such as a waterfront dispute, the decline of the $A and a long wet season.
However, there appear to have been other problems as well. According to Minerals Corporation Ltd, which bought 45 per cent of Skardon River, there were deficiencies in geological definition of the kaolin deposit. Vic Alexander, the executive chairman of Minerals Corporation, told Pierpont: ``When we went in to do due diligence, we couldn't find the geological survey.'' So they had to start a drilling program to confirm the deposit.
After mining the kaolin is pumped 16 kilometres through a slurry line and then put through a dry plant. Instead of giving the whole job to one contractor on a turnkey basis, Australian Kaolin split the contract.
That's sometimes not a good idea, because if anything goes wrong there's no single head contractor to blame. At the Skardon River dry plant, things went wrong. The spray dryer blew up and the bricks in the calciner (kiln) came loose. Contractors who had only part of a contract or who hadn't been paid refused to fix things.
It does not pay to take kaolin out in shipments of less than 20,000 tonnes and ships cannot enter the shallow Skardon River. Therefore, the dry, fluffy kaolin produced from the dry plant would have to be barged out of Skardon River 120 kilometres south to Weipa and stored in a very large shed until it could be shipped from there. The shed was never built.
The receivers, appointed by Dresdner, put Skardon River up for sale. It must have been a slack time in the kaolin market, because the best bid they got was from Minerals Corporation and a bunch of associated investors, who paid $6.5 million.
At first Pierpont thought he had missed a nought. But he rang and checked and the number was correct. Indeed, the only cash put up by Minerals Corporation so far is $1.5 million and the remaining $5 million will be paid next June and December. A bargain to put Mrs Pierpont's best millinery scoop in the shade.
It's worse than it looks. All up, Australian Kaolin raised $54 million from the punters and another $20 million from Dresdner. After receivership Dresdner apparently put in another $2 to $3 million to keep Skardon River operational while they found a buyer. Unsecured creditors amount to a further $10 million.
In addition there is the power plant which seems to have cost around $7.5 million. Australian Kaolin shuffled the cost of this off the books by having it owned by the Commonwealth Bank, which leased it back to Australian Kaolin. After Australian Kaolin went bust, the CBA repossessed half the power station and shipped it out an engineering task Pierpont would love to have witnessed.
If we add all those numbers together, Australian Kaolin raised a total of about $95 million. A couple of bars might have found their way to other bits of the company, but nearly all of it was spent on Skardon River. Which was supposed, according to the original prospectus, to have a maximum construction cost of $47 million. And which has now been sold for $6.5 million.
That blood you see dripping down the walls belongs to creditors as well as shareholders. Among the shareholders, Mark Creasy and Ralph Sarich have some wallpaper for the appropriate room in their houses. Another big wound was taken by Sons of Gwalia, which came in as a vulture when Australian Kaolin shares hit 15¢ and picked up 15 per cent for $5 million.
Dresdner has taken the biggest wound. Ignoring its financing of currency hedges which have presumably been unwound, Dresdner was owed $25 million when Australian Kaolin hit the wall. Assuming Minerals Corporation meets its payments for Skardon River, this will be reduced to $19 million which Dresdner might as well write off now. (Incidentally, that means that if the administrator followed the directors' advice and sued Dresdner, $19 million of whatever he won would have to be paid back to Dresdner.)
The small unsecured creditors have been taken care of, but the large ones look like losing the lot.
The winners are the lucky associates of Minerals Corporation who picked up 55 per cent of Australian Kaolin for about $3 million and are now being taken out by Minerals Corporation for double that amount.
Vic told Pierpont that when Minerals Corporation first decided to buy into Skardon River there were doubts about the geology and a long list of potential lawsuits. So Minerals Corporation laid off 55 per cent to some of its own major investors to reduce its risks.
On second thoughts, it is not yet established that Minerals Corporation really has a bargain. It still has to buy back the 55 per cent of Skardon River, define the ore body, build a power plant, fix the dryer and calciner and build a shed at Weipa. That sounds like several million dollars, which Minerals Corporation doesn't have. Then it has to establish that it can produce kaolin that somebody wants to buy at an economic price.
Oh, and it has to produce all its kaolin in a 10-month year. For the other two months (which happen around now), the weather is too wet. And finally, if Skardon River is such a bargain, Pierpont is a bit surprised that someone such as Comalco, BHP or Sons of Gwalia all of whom know the deposit well didn't push the price a bit higher.
Mrs Pierpont may yet have been the best bargain-hunter of all.
MSC Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
