Published in the September 2006 Mining Monthly
Ten years ago, there were about a dozen multiple-mine, independent, Australian mining companies. Dominated by gold miners, the list included Normandy Mining, Acacia, Goldfields, Delta Gold and Plutonic Resources, as well as a much smaller list of the far more valuable diversified majors such as North, Western Mining and MIM Holdings. Today that cupboard is bare, after all were cleaned up by multinational, mainly offshore, raiders.
Welcome to globalisation and a track record that suggests Australian companies make good miners but generally poor empire builders – although at least in the bunch cited, Goldfields and Delta did merge into AurionGold before being then taken out by Placer (which subsequently was swallowed by Barrick).
It is a record that lends some weight to the warning last month by Southern Cross Equities director Charlie Aitken that the best Australian miners on the Australian Stock Exchange were in serious danger of being snapped up by companies listed in other jurisdictions – principally North America and, to a lesser extent, London.
The long-argued claim is that Australian stocks are significantly undervalued by investors, putting them at a serious disadvantage in transactions involving North American and European companies.
Reasons for the lower Australian valuations are a subjective minefield, though the contrast in size and liquidity between the ASX and Toronto Stock Exchange are an obvious starting point.
According to recent TSX data, the TSX (and its associated “Venture” exchange) have 1223 companies listed compared with the 507 on the ASX. Some 699 mining and exploration financings were undertaken on the TSX in the first half of 2006, raising $US6 billion ($A7.9 billion) – equivalent to 82% of the total number raisings worldwide by number and 53% of the total value.
Elsewhere, some $3 billion was raised in London, while in Australia a comparatively paltry $765 million made its way into company bank accounts.
On basic metrics, the ASX-TSX comparison shows that a country with 30% of the total number of companies has raised a mere 11.3% of the total capital raised. (And the numbers get far worse from the ASX company perspective when the London Stock Exchange and its related Alternative Investment Market are added to the equation.)
It could be argued this represents a derivation of sorts of Australian historian Geoffrey Blainey’s famous “tyranny of distance” thesis, with Toronto’s locale on the doorstep of the massive North American capital markets giving it an armchair ride on the back of equity’s endless search for investment opportunities.
However, well-respected investment manager Robin Widdup claims there are more than geographical issues at play when it comes to the positives of the Canadian market.
He believes the flow-through share scheme in action in Canada – where investors can gain tax credits for money spent on approved exploration projects/targets – is a significant reason behind the depth of market and the “flamboyant” valuations accorded Canadian companies compared to those for Australian stocks.
“My subjective answer [for the contrast between the markets] is that it comes down to the Australian Government being quite negative on exploration and refusing to even think about flow-through share funding,” he said.
“Whereas the Canadians are happy to do it. And they have a very active market, and because you have such a deep market, you get things trading at a premium … including exploration.
“Here you have a discount on exploration. And it’s entirely due to the government looking at our market and saying we’re not really bothered about exploration.”
Whatever the reasons, the bottom line is, the TSX clearly has more muscle. Nearly 40 TSX mining companies currently have a greater than $1 billion capitalisation, which is around four times as many as is in the case in Australia.
Outside of the heavily multinational mega-majors BHP Billiton and Rio Tinto, Australia’s larger resource companies include Alumina, Newcrest Mining, Zinifex, Oxiana and Lihir Gold, with capitalisations ranging from $A8 billion for Alumina down to $3.5 billion for Lihir.
Further down the value list lies Paladin Resources, Iluka Resources and Fortescue Metals, and the coal trio of New Hope, Centennial and Excel, the latter which itself is set to become another Australian statistic courtesy of a fat offer from American major Peabody.
The combination of a discounted Australian sector and a horde of more highly valued North American companies might intuitively ring alarm bells – as it has done for market players such as Aitken – though a recent Goldman Sachs JBWere report suggested that a round of consolidation amongst the Australian midcaps is at least as likely as bids from global majors.
That is because the broker claims the current Australian resources sector is currently too small to matter. GSJBW says the vast majority of Australian stocks lack “sufficient critical mass to ‘make a difference’ for larger potential acquirers”
While this may indeed be the case for the biggest North American majors, it would not seem unreasonable to speculate that some of the 35 or so other plus-$C1 billion ($A1.2 billion) Canadian mining and exploration companies might be casting an eye over the scene Down Under.
Especially given the growing re-emergence of sovereign risk issues worldwide include an expanding list of countries in the regular Canadian hunting ground of South America as well as the red-hot mergers and acquisitions scene in Canada at the moment.
According to a recent report by Toronto investment bank Crosbie (as reported by Reuters), there were 50 mining and metals transactions in the second quarter with a combined value of $9.5 billion and significantly, the big bids for Falconbridge and Inco were not said to have been included in the data because they had not yet been finalised. And nor was the more recent Goldcorp-Glamis Gold merger.
Thus far, most of the deals involving offshore raiders and Australian miners have been modest in scale and golden in nature – BHPB and Xstrata aside. They have included the likes of Toronto companies Champion Resources and IAMGOLD taking over Australian outfits Red Back Mining and Gallery Gold, respectively; and Wheaton River buying the Peak mine in New South Wales.
More recently, two or three Australian uranium juniors have...click here to read on.
