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High hopes for Compass dashed

* Jamie Freed
* August 25, 2008
* Page 1 of 2

IT is hard to underestimate the importance of good project execution in the mining industry.

Investors are often taken in by tales of mineral resources in the ground worth billions of dollars. With that much metal in the ground, how could you go wrong by investing in the company? In fact, it can sometimes cost more to extract the metal than the price received by customers - even in boom times.

In tandem with the boom in commodity prices, the price of extraction has also risen due to increased prices for labour, steel and equipment. And for certain commodities, the extraction price has outpaced the rise in the metals price.

Nickel and zinc miners have been doing it tough this year as the price of the metals has fallen sharply, but there is no real abatement in the mining cost. Broken Hill zinc minerPerilya sacked more than half of its workforce last week, after a similar move by rival CBH Resources to high-grade its own zinc operations.

This week, The Drum has examined a base metals miner with a project that is nearly complete but appears marginal at best due to capital and operating cost blowouts and commodity price falls.
Lots of promise


Compass Resources was once one of the stars of the mining boom due to the apparent strength of its polymetallic projects, about 100 kilometres south of Darwin.

In 2006, the Sydney company signed a landmark deal with China's Hunan Nonferrous Corporation to fund the entire $72 million capital cost of its Browns oxide project in return for a 50 per cent stake.

HNC also agreed to fund the feasibility studies for a later-stage sulfide project and the entire capital cost of the development - now thought to be about $1 billion - in return for a 50 per cent stake.

From there, it was a quick ride to the ASX 300 index in September 2006 and the ASX 200 in January last year after its shares reached more than $5.50 and its market value was over $550 million. Like fellow climber Fortescue Metals, Compass was chaired by Gordon Toll and New York hedge fund Harbinger Capital Partners was a key shareholder.

The Browns oxide project was scheduled to start production by mid-2007 and it was estimating a $17.5 million profit last year and a $27.6 million profit this year based on reasonable metal price assumptions.
But costs blow out


Compass now expects the long-delayed oxide project will finally enter production next month, at a capital cost of $205 million.