here you go blao. hope this helps with some of the pain.
Dryblower sees light at the bottom of the magnetite barrel
Monday, 3 December 2012
AUSTRALIA’S accident-prone magnetite iron ore industry, which Dryblower has watched lurch from crisis to crisis, could finally be reaching the bottom of its long decline after a final horrid month of legal disputes, a government hand-out, a fresh capital call and a light dusting of mothballs.
Unfortunately, the explanation for a feeling that the worst might be over is not for the best of reasons.
It’s because of a belief that not much else can go wrong as the survivors in the business of upgrading low-value iron ore move out of the construction phase and try to prove that they have viable businesses.
If they can produce a promised “premium” iron ore product at a substantially lower cost than it takes to make then the magnetite miners could begin a long climb out of the financial hole they’ve dug with their appalling cost blow-outs and completion delays.
Regular readers of this column might be surprised by this flash of enthusiasm from Dryblower, who has previously been the industry’s staunchest critic for the way in which it has grossly over-promised and under-delivered.
The heading on one story in June last year summed up the view at the time: “Dryblower on the great magnetite massacre” (link here), a comment which triggered an outpouring of criticism from the true believers in the industry.
But, if you look back at what’s happened since that headline captured the attention of investors there has indeed been a massacre. On the day of publication (June 20), Gindalbie Metals, one of the leaders of the industry, was trading at 83.5c. Grange Resources, another favourite, was at 47.5c and Centrex Metals was at 35c.
At the close of business last week, Gindalbie was down to 29.5c, Grange was at 22c and Centrex was at 18.5c. By any measure a stock that falls by 50%, or more, has been massacred, though it is rare to apply such a description to an entire sector of the mining industry.
Can it get any worse? That’s the question investors will be asking, and while we could see a last-minute crisis or two it probably can’t.
When you’ve fallen as low as the magnetite developers there is really only one way to go, and that’s up, even after a month of negative events that included:
The WA Government providing a helping hand-out in the form of a royalty holiday to ease financial pressure on the magnetite processors.
A breakdown in relations between the Chinese owners of the Sino Iron project and the man who sold the mineral claims and who is waiting on royalty payments, Clive Palmer.
The official mothballing of the Southdown project of Grange Resources, which has struggled to find a joint venture partner in a difficult financial climate, and
A surprise, and unwelcomed, $62 million capital raising by Gindalbie, which is in the final commissioning stages at the Karara mine and is keen to not be torpedoed by any repeat of the pain caused by the sudden iron ore price fall which hit all iron ore miners mid-year.
The remaining challenges for the projects which have survived are largely financial and should prove to be more manageable than the construction hurdles that tripped over-confident management teams.
Looked at dispassionately it is an ugly picture, with Sino the ugliest of all, being at least $4 billion over budget and three years late. Gindalbie has done a little better, being at least $1.5 billion over budget and “only” two years late.
So, after years of disappointment, why might there be a change for the better? The answer is that all businesses eventually reach a point where they begin to move forward, if only because they can’t go any lower.
In the case of the magnetites, the bottom might have arrived. The Southdown project of Grange has joined Murchison Metals in the drop-out category, but Gindalbie and Sino might soon be regular suppliers of processed iron ore to Asian customers.
Tweaking finances, such as adjusting royalty rates and raising fresh capital to handle any last-minute glitches, are confirmation that the physical building phase is over and it’s now time to build a business case.
The switch of focus could also see widespread management changes as the construction team is replaced by an operations team, many bringing the skills most admired by investors; cost cutting.
With luck, and they might still need it, the magnetite processors which have survived might actually emerge as viable operations – if the horrible mess of the construction process can be forgiven, if not forgotten.
GBG Price at posting:
22.5¢ Sentiment: LT Buy Disclosure: Held
