From The West Australian - August 7This is worth a read for...

From The West Australian - August 7
This is worth a read for those lhaving a serious look at SGW...There are some real problems there....but there may yet be some upside once the sell down is complete...I think SGW will remain a going concern, but being able to pick the right entry point will be key to a proftable trade..if the announcement of the closure of Tarmoola occurs when the share price was around $1 at that stage at ..might be an attactive entry point. Even though SGW's debt and hedge book are real problems, they can probably be mangaged if the board is clever about it..

I would be interested in getting some insightful feedback from those closely following this stock


Gwalia sweats on review


Whatever the recommendations of new Sons of Gwalia boss John Leevers when he hands down the outcome of a strategic review of the crisis-ridden gold and tantalum miner in two weeks, the news will be bad for workers at its big Tarmoola gold mine near Leonora.

For when the review is made public, there isn't an analyst in sight prepared to bet the operation, one of Gwalia's biggest gold producers, will be given a stay of execution.

For investors, who have seen the value of their shares fall to less than a fifth of their sub-$10 peak in 2001, Tarmoola's closure will hopefully signal the former Pioneer International executive has found a path out of the morass threatening to engulf what was once the bluest of blue-chip WA companies.

But Gwalia's sheen was abruptly removed in 2002, when operational problems at Tarmoola - acquired in its costly $220 million takeover of PacMin Mining - a drastic downturn in the tantalum market and fears about its massive hedge-book sent the stock plummeting.

Despite rallying over the past 18 months, the recovery was dashed last month when Mr Leevers warned problems in both the gold and tantalum divisions meant earnings this year would not better an expected $21 million result for 20003-04.

August 23 - when Mr Leevers reveals the outcome of the review of virtually every aspect of Gwalia's business - is shaping as the most critical moment in the company's 23 year history. Analysts expect two key actions to be implemented.

Firstly, a drastic rationalisation of the gold business, starting with the immediate closure of Tarmoola, the acquisition of which is now considered by many as the catalyst for Gwalia's problems.

Secondly, they expect write-downs of up to $350 million to remove capitalised expenditure and worthless goodwill associated with the PacMin deal.

They are also sweating on greater clarity about the prospects of the tantalum business, after news that grades had fallen significantly and contracts with Gwalia's biggest tantalum customer had not been renewed.

The most immediate problems lie in the gold business.

Despite producing 521,000 ounces at an average cash cost of $438/oz in 2003-04, total costs averaged $551/oz. And cash costs at Tarmoola averaged $588/oz in the last quarter, after a pit wall collapse in February which ended all hopes of a cutback to recover higher grade reserves.

"I think they'll be rationalising as much of the gold business as they possibly can," Fat Prophets co-founder Grant Craighead says. "Basically the gold business is doing little better than cash flow break-even, and they've got mature low quality assets from here on."

According to Mr Craighead, closing Tarmoola would remove a significant cash drain, while selling the Laverton operations, and the undeveloped Gwalia Deeps project at Leonora could generate some extra cash.

But the Southern Cross operations would probably have to be retained for Gwalia to gradually wind-back its remaining hedging commitments, which still exceed 1.3 million ounces.

Though Gwalia's hedgebook, which was $348 million underwater at June 30, continues to frighten some investors, few believe it is an unsurmountable problem.

"I think they are very manageable," RBC Capital Markets analyst Geoff Breen says, noting a large portion of Gwalia's commitments this year could be rolled over or closed out. And Gwalia had already "significantly reduced" its commitments over the last two years.

Despite Mr Leevers warning about falling tantalum grades and the uncertainty of its contract with US-based Cabot, which together with Germany's Starck, accounts for 85 per cent of refined tantalum sales grades, analysts generally agree Gwalia's strategic slice of the tantalum market makes it potentially valuable business.

The company controls 75 per cent of the world's known reserves, while its Wodgina and Greenbushes mines account for 55 per cent of global supply, producing over 2.1 million pounds a year, a figure set to top 2.3 million pounds in 2005..

"They do have some near term cost issues, but anyone with better than 50 per cent of the market for any commodity is in a good position," says Mr Craighead.

It is a point backed by Mr Breen.

"Two customers account for about 85 per cent of the world's tantalum (metal). They don't have a business if Gwalia ceases to exist," he argues.

Already, Starck has extended its 800,000lb a year offtake agreement until the end of 2008, while Mr Leevers still believes a new deal will also be struck by Cabot, despite warning last week that arbitration could not be ruled out.

According to UBS analyst Shaun Giacomo, even though grades at the Wodgina mine in the Pilbara are lower than most analysts had previously believed, margins remain attractive. Gwalia also has the capacity to increase output as high as three million pounds once it resumes underground development at Greenbushes in the South West.

"You can easily see they're making a margin of about $20 a pound, which is excellent. So if that goes to $17, it's not the end of the world," he says. "Tantalum is a good business, but the problem is it hasn't been able to subsidise a loss-making gold division."

Still, analysts have been stung too many times and no one is prepared to make any bold predictions until the review is complete.

"It's a bit like swimming between the flags at the moment," says Mr Giacomo. "We welcome the new management team but the question is how much damage has been done to the integrity of the assets and the balance sheet."