Dryblower on a forgettable mining record

THERE are some records you don’t want to know about, which is why Dryblower will be delicate in explaining why last week’s record of 39 mining stocks hitting 12-month share price lows has set the scene for wholesale change.
Dryblower on a forgettable mining record Dryblower on a forgettable mining record Dryblower on a forgettable mining record Dryblower on a forgettable mining record Dryblower on a forgettable mining record


Tim Treadgold

Perhaps, in the worst days of the 2008 financial crisis, conditions were worse. But last week’s count was eye-opening for a number of reasons, mainly because it involved some big names that had previously attracted unquestioning investor support such as:

Paladin Energy, once a company loved by everyone, even if it was mining the world’s least loved mineral, uranium.

Lynas Corporation, the great hope of believers in rare earths and a forecast future of booming demand for that odd family of elements.

South Boulder, the leader of the rush into fertiliser stocks in the belief that an agricultural boom would follow the mining boom.

Mount Gibson Iron, an early mover among the smaller companies trying to profit from China’s appetite for iron ore, and

Whitehaven Coal, a stock which emerged from obscurity to become a household name in the coal sector.

None of the five singled out for special mention from the 39 which reached fresh lows has done anything particularly wrong, with the possible exception of committing the classic management mistake of over-promising and under-delivering.

In good times, mining company directors can get away with the occasional burst of rash optimism because investors are willing to believe anything they hear.

When the going gets tough, as it is today, investors switch from a glass-half-full view of the world to a glass-half-empty view.

That switch is easy to understand when you stand back and look at the bigger picture of a global economy in near-crisis mode.

Europe is officially slumping into a second recession. The US is stumbling towards a return to recession as it gets close to its fiscal cliff, and China is attempting to switch its economy from an export focus to one of internal consumption, effectively altering the spending patterns of more than a billion people.

Add them together and more than 60% of the global economy is struggling to make headway, a fact that lies behind the project deferrals of the big mining companies such as BHP Billiton and Rio Tinto, and which has dried up the flow of equity and debt into the small end of the market.

That’s enough of the big picture, now for a closer look at what happened to the five stocks mentioned earlier, and an attempt to explain why they slumped to 12-month lows.

Paladin, a stock which traded as high as $10.44 in early 2007, dropped last week to 74c partly because of the depressed uranium price, partly because it has not posted a profit in the past five years, but also because its founder, John Borshoff, chose the most awful time to sell a parcel of shares. No matter what the explanation, it was the founder selling that triggered Paladin’s latest crisis.

Lynas, which hit a high of $2.53 in April last year, dropped to 55.5c last week because it has been unable to complete its promised two-stage mine and process plant development, but also because demand for rare earths is not as strong as promoters claimed.

South Boulder, which reached $5.34 in March last year, fell to 47c last week because of uncertainties about potash demand, uncertainties about its Colluli project in Eritrea and even deeper uncertainties about the government of the country, which has suddenly demanded a bigger slice of the action, and which is in the bad books of the United Nations.

Mount Gibson, which hit a high of $3.50 in early 2008, slumped to 63.5c last week because it operates old, high-cost mines and continues to have trouble with its Chinese masters, who are both its major shareholders and major customers.

Whitehaven, which traded up to $6.60 in April last year, fell to $2.70 last week because of falling coal prices and concern that its biggest shareholder, entrepreneur Nathan Tinkler, might soon exit the stock.

If there is a common thread linking those five one-time highflyers it is that investors have lost confidence in the underlying business case, the management team, or both.Whatever the reasons, last week probably marked the start of a renewal process known as “creative destruction”

Mergers, to cut head office costs, will become common. The hunt for exotic minerals will be replaced by a return to the basics of gold and base metals, and fresh managers will replace today’s tired teams – with each step driven by the demands of jaded investors.