Africa beckons as the glitter fades on local gold Robin Bromby From: The Australian September 11, 2010 12:00AM
JON Price is about to float a gold stock and he knows that, down the track, its success could make his Phoenix Gold a takeover target.
He can live with that. His main concern would be to ensure shareholders reap a premium price.
Mark Thompson listed his Talga Gold in August believing that a couple of his shareholders had taken stakes just in case it came up with something big, and they therefore would have a head start if it came to making a bid.
In the past week, two emerging gold powerhouses have been lured by Canadian players -- Argentine emerging producer Andean Resources by Goldcorp, and West Australian producer Avoca Resources, which has forged a "merger of equals" with Anatolia Minerals.
Welcome to the modern gold scene in Australia. Hollowed out one day by foreign predators, bristling with new entrants the next, but new entrants that know their success could end their independence.
We're losing out on two fronts.
On the corporate side, any company that sticks up its head with the potential to produce 200,000oz a year is ripe pickings for a North American predator.
Last year Newmont Mining sold 5.3 million ounces of gold. If it can't replace those ounces with exploration -- and 5m ounces a year is a very big exploration ask -- it has to buy them.
Meanwhile, our junior sector is increasingly working outside Australia. Most of the easy ounces have been discovered in Australia, and now the low-hanging fruit can be found in Africa and South America. No one doubts there is plenty of gold still to be discovered here, but it is probably under deep cover and expensive to find.
So we are becoming a lesser player in gold and sidelined in ownership.
Take Newcrest Mining out of the mix and all the big gold miners here are based in either Denver (Newmont Mining), Toronto (Barrick Gold) or Johannesburg (AngloGold Ashanti and Gold Fields). Between them, they control the powerhouse mines: Kalgoorlie Super Pit, Plutonic, St Ives, Sunrise Dam, Granny Smith, Boddington, Callie, Cowal and the emerging Tropicana.
Apart from Newcrest, all the big ones have been taken out. Now any company looking as if it will make the mid-tier is a target.
As soon as a gold company achieves some sort of critical mass, it either gets taken out or dual-lists in Toronto, after which the register tips in favour of North American investors, a move often followed by full emigration.
Earlier this year, for example, Centamin Egypt delisted from the ASX to move, along with its 14 million ounce gold resource, to dual listing on the main boards in London and Toronto.
North American investors tend to value gold companies at roughly double the rate that Australians do with their home-grown stocks. Moving to Toronto brings an immediate re-rating.
The hollowing out of our gold industry began when the then US gold major, Homestake Mining, bought out Plutonic Resources and its large West Australian gold mine (and Homestake was subsequently swallowed by Barrick Gold).
Then, in 2001, the former WMC sold its West Australian gold assets to South Africa's Gold Fields at the bottom of the gold market, repeating a similar piece of bad timing by the Reserve Bank of Australia, which sold its gold reserves in 1997 at what now seems a ridiculous $US332 an ounce.
Then the rot set in and, one by one, they fell -- from Normandy Mining to Hill 50 Gold, from Abelle to New Hampton Gold Fields. In Africa, we've lost Moto Gold Mines to South Africa's Randgold. Then Red Back Mining moved to Toronto and has since become a star with its mines in Ghana and Mauritania. So much of a star, in fact, that it is now being swallowed by Kinross Gold for $US7 billion. Now we just wait to see who will make the first lunge at our Ghana star, Perseus Mining (which, of course, has dual-listed in Toronto as the first step in the process).
To give them their due, the foreigners have taken on projects that have flummoxed Australian companies.
Vancouver-based Northgate Minerals bought out the Fosterville and Stawell mines in Victoria when it paid $282 million to take over (and rescue) Perseverance.
Then one Canadian company rescued another when Crocodile Gold took over a large gold landholding in the Northern Territory from the collapsed GBS Gold, which had originally bought the project from local explorer Renison Consolidated.
Something vital has been missing here for a decade: a viable mid-tier gold sector.
When investing in a substantial, world-class gold producer, local traders are confronted with Hobson's choice. With Lihir Gold about to disappear next week, it will now be its new owner Newcrest Mining or nothing.
Other than that, there's a small coterie of small and mid-scale producers, and then a large swag of explorers.
Even then, the more alluring explorers seem to be those that are working outside Australia.
Investors have been pumping up the West African gold stocks, and now seem to be turning their attention to Brazil.
So, even with the explorers, Australia gets only a limited look-in these days.
Industry veteran Ron Manners is probably representative of most investors.
The man who founded Croesus Mining with his wife around the kitchen table of their former home at No 7 Croesus Street, Kalgoorlie, and subsequently listed it in 1986 (and has been involved all his working life in exploration), says that his investment portfolio these days is almost entirely made up of Australian companies working in Africa or South America.
One of his investments is seed capital in an upcoming float, Middle Island Resources, which has picked up gold plays in Burkina Faso and Niger (and which will have Newmont Mining as an 11 per cent shareholder).
Manners says all investors in Perth talk about these days is exploring in Africa, not here.
"They're all planning their futures elsewhere," he says.
This was underlined for him as he moved around the Africa Downunder gathering about a week ago in Perth.
"I didn't meet a single person who was talking about drilling holes in Australia," Manners says.
BGF Equities analyst Warwick Grigor is not too fussed about the takeovers.
He sees them as part of the business cycle: gold companies get taken over or die, and no company is too big to be taken out.
"Size is no defence, as we saw with Lihir," Grigor says.
And Newcrest? So far, gold companies have been deterred because 30 per cent of Newcrest's revenue comes from copper, but one day someone will make the move, he says.
Perseus Mining knows this and has a "phenomenal" drill program under way in Ghana and Ivory Coast to add ounces before a bid is made, making their shares as expensive as possible, he says.
Keith Goode, a gold analyst for more than 30 years and now running Eagle Research, says the encouraging aspect of the takeover of Andean was the chance for shareholders to take Goldcorp scrip, which left them still in the game, unlike past cash bids.
The other good news, he says, is that there is a clutch of new gold floats coming up in the next few months, as the industry renews itself from below.
