Dryblower on 2012, the year of the great cash drought

AT first glance BHP Billiton and Chalice Gold have little in common but as Dryblower weighed up the year just past and the year ahead he recognised the common thread – it’s called cash.
Dryblower on 2012, the year of the great cash drought Dryblower on 2012, the year of the great cash drought Dryblower on 2012, the year of the great cash drought Dryblower on 2012, the year of the great cash drought Dryblower on 2012, the year of the great cash drought


Staff Reporter

In late December, Chalice agreed to sell its 60% stake in a valuable gold project rather than push ahead with what looked likely to be a difficult approvals and funding process.

A month earlier BHP Billiton had been to the global bond market, the place where governments and big companies raise long-term debt, and returned with a surprise – it got more money than it initially asked for at an interest rate lower than what most governments pay.

Novice observers of financial markets might not see the connection but seasoned players of financial games could see from those two examples that 2012 is going to be the year of cash – who has got it, who hasn’t and who can survive what could become a cash drought.

The core issue of the situation in which the world finds itself is that everyone is carrying excess debt, triggering the start of a process that will one day be known as the Great Deleveraging.

Europe is the epicentre of the GD because some member states such as Greece, Italy and Spain mistook taverna lifestyle as productive industry, but layered on top of the financial/political crisis engulfing Europe is a new-found fear of debt in the US and most other countries, including Australia.

From being a world hooked on borrowed money a Great Flip (henceforth known as the GF) has occurred, with people who have money squirreling it away in banks and under mattresses, and those who haven’t forced to beg.

Chalice was not exactly begging when it agreed to quit Koka for an initial $US80 million, with $US20 million to come, and there are special circumstances in Eritrea which encouraged the early exit, such as UN embargoes on some business activity in the country.

The real question confronting Chalice was one of cash in the hand versus possible future cash after raising the required $US122 million in capital to develop the Koka mine.

Rather than trying to raise a debt and equity package when banks and investors are ducking for cover, Chalice figured that having the best part of $US100 million on deposit was a better option, especially as it is now set up to buy ever-better assets (in less troubled countries) from distressed sellers.

BHP Billiton’s cash experience was somewhat different but an example nevertheless of cash seeking a safe home. It went to the market in November seeking around $US2 billion in long-term debt as part of a tax-efficient refinancing exercise. It was bowled over.

Rather than raising $US2 billion it got $US3 billion, at interest rates ranging from 1.125% on its three-year bonds up to 3.25% on 10-year bonds.

What’s so terribly important about that 10-year BHP bond is that it is paying an interest rate about 0.5% less than that paid by the Australian government.

In other words – and this is the astonishing bit – the world of money believes BHP Billiton is less risky than Australia.

Leaving aside any political point-scoring about the nature of the current government in Canberra, the bond prices are a measure of how the people who have money rate their chances of being repaid in full, and that question comes down to a judgment of who’s running the better business – a big resources company or a mid-sized government with a triple-A credit rating.

As 2012 gathers pace the BHP Billiton v Australia exercise and the Chalice-takes-the-cash exercise will be seen as important signposts to what lies ahead.

It will be a period of acute capital constraint as governments and companies rush to retire debt, households squirrel away 10% of what they earn (the highest savings rate in 50 years), austerity in Europe drives the region into a deep recession, China struggles to grow in a world that is not interested in its exports, and only the best resource projects attract the funding required to get started.

On that last point, consider what happened to Moly Mines last week when it mothballed development of its Spinifex Ridge copper and molybdenum mine just six months after arranging a $US494 million debt package.

The Moly experience, like that of Chalice, illustrates how careful investors and banks will be in 2012 as they wait for Europe to find a solution to its problems.

Caution will be the key word for the first half of 2012, and cash will be king.

This story first appeared on ILN's sister publication Miningnews.net.