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Feature Story
Date: February 15, 2005

Sons Of Gwalia Creepeth Into Trouble,

By Our Man In Oz.

Shakespeare only had a school boy to describe slow movement in his famous line about a schoolboy “creeping like a snail, unwillingly to school”. If he had been writing As You Like It today he could have called on equally apt images, such as the speed of the administrators in sorting out the affairs of failed Australian gold and tantalum miner, Sons of Gwalia.

February marks the half-year anniversary of SOGs failure, with a handful of asset sales, rumours of widespread interest in the gold interests (at the right price) and even more rumours about interest in the tantalum assets. But after that the situation becomes somewhat more tricky with talk of legal action in the wings, and unfriendly developments in the global tantalum market.

The legal talk started with plans by a shareholder ginger group, back by a specialist litigation fund, to start a class action based on the alleged misleading of investors. That ambitious plan stumbled at its first hurdle last November when the Australian Federal Court rejected an application by the IMF fund to use the SOGs share register to contact potential parties to join an estimated 140 SOG shareholders said to be offering their support to the action. More may develop on the legal front later.

In the meantime the administrators, accountants with the specialist insolvency firm, Ferrier Hodgson, have applied for and been granted an extension of their brief until the end of April, apparently because SOGs affairs are so complex they need far longer than usual to sort out the situation. Given that few people outside SOG ever understood the company’s gold hedge book and forward selling program, and it appears that ignorance may even have extended to inside the firm, the request for extra time is understandable when it comes to the gold assets.

It’s a different case with lesser investments and the administrators are starting to exercise their authority with the sale last week of a small parcel of shares in the titanium minerals miner, Bemax. The disposal of 25 million shares at between A13.5-and-A14 cents a share raised a useful $3.5 million. Another parcel of 28 million Bemax shares are in escrow until later in the year.

Other developments in this slow moving affair include the formal resignations, five months after the event, of the non-executive directors of SOG, and a decision by the administrators to spend A$18 million on re-starting underground operations at the company’s Greenbushes tin and tantalum mine in the south-west of Western Australia as part of a deal to supply tantalum to the second biggest customer, HC Starck.

It is this deal, and the outlook for tantalum which starts to make the future of SOGs very interesting. By investing in new mine capacity, the administrators have given a very clear signal that it is business as usual, or almost. That says two things. The banks and other financiers who stand behind SOG have told the administrators that the business is worth more alive than dead. Secondly, that any offers to buy the tantalum business have, so far, not been high enough to do a deal.

Keeping a business in limbo is not new in Australian mining. A banking syndicate kept Pasminco on life support for years before it re-emerged as Zinifex. Barrack Silicon was also keep going by the banks until it was eventually sold to a Japanese trading house. The Pasminco and Barrack experiences may be pointers to the future of SOG, especially its tantalum operations. Gold, minus the dead weight of the hedge book, will almost certainly go to one, or more, of the myriad of small fry keen to buy something (anything?) which will demonstrate to the world that they are in production. Tantalum is different, and far more difficult.

Just how difficult can be gauged by two significant events. Over the past 12-months, while the price of just about every other mineral and metal has been rising, tantalum has been flat, or falling. Not a lot, but from around US$/kilogram on the European market last July tantalum has slipped to recent price quotes of US$180/kg. The cause is simple: too much supply, and falling demand in the critically-important electronics market.

From being a dominant supplier, accounting for an estimated 55 per cent of the global market, SOGs has been joined by others, and by a host of would-be producers, such as Gippsland which is planning to develop the low cost open-pit Abu Dabbab project in Egypt. But, even before Gippsland enters the market the news from the electronics industry is not good.

According to a mid-January report in the trade magazine, "Purchasing", the tantalum capacitor market (capacitors are tiny switches used in devices such as mobile ‘phones) will grow from US$2.2 billion in 2004 to US$2.3 billion in 2005. Faster growth, however, is expected in the ceramic capacitor market, and there was this shot-across-the-bow of the tantalum market: “Suppliers don’t expect any supply problem with tantalum in the foreseeable future. Plus, pricing for tantalum material is stable with some capacitor suppliers successfully negotiating for reduced pricing for 2005.”

That is not what the administrators of a failed tantalum miner want to read, but it is what’s happening in the market, and it is a pointer to the SOGs administration being a drawn out affair, possibly another Pasminco/Zinifex in the making.