Dryblower on bare bottoms at low ebb

“YOU only find out who’s swimming naked when the tide goes out.” That was Warren Buffett’s famous quip about people caught without cash in the 2008 financial crisis, but it’s a remark that Dryblower suspects will soon resurface.
Dryblower on bare bottoms at low ebb Dryblower on bare bottoms at low ebb Dryblower on bare bottoms at low ebb Dryblower on bare bottoms at low ebb Dryblower on bare bottoms at low ebb


Tim Treadgold

Cash, the stuff that rivals ore-grade, has reclaimed its status as the king of the mining world, because while owning a high-grade mineral deposit feels good, it is cash that pays for its development.

Over the past few weeks the importance of cash in the bank, or a rock-solid relationship with a bank, has become the number one issue for miners at the top and bottom of the industry.

Just as Buffett, one of the world’s richest men warned four years ago, a shortage of cash at a time when prices are falling, and deals unravelling, is a time when swimmers without trunks risk a combination of exposure and embarrassment.

At the shallow end of the pool the naked swimmers among the smaller exploration stocks will become obvious over the next few weeks as June quarter cash reports are filed.

At the deep end, a surprising number of high profile deals are having doubts raised because of concern that there isn’t the cash to meet the full cost, or that banks and external investors are being very cautious in providing the cash to complete a transaction.

A glimpse of what’s to come at the shallow end was seen in the March quarter reports when a number of naked swimmers were spotted. Some managed to reach quickly for a cash top up from investors, the equivalent of a quick dash ashore to grab a towel. Others simply sank beneath the surface, preferring to fall into the hands of a receiver or liquidator.

It’s slightly different at the deep end where billions of dollars, not mere millions, are being talked about, but the principle of needing to raise cash remains the same.

Even Gina Rinehart, Australia’s richest person, is reported to be having issues with her banks as she puts the finishing touches to her flagship iron ore project, Roy Hill.

Nathan Tinkler, another member of assorted “rich lists” has raised eyebrows at the time it has taken to organise his privatisation bid for Whitehaven Coal, and even when the latest announcement late on Friday it was confirmed that financing arrangements are incomplete.

“Firm commitments of debt funds for the transaction remain subject to satisfactory completion of due diligence and detailed documentation,” is how Whitehaven reported the fact that all of the money for the $A5.3 billion deal is not yet in place a month after it first surfaced.

The problem for all players at a time of tight cash is that the people who do have access to liquid funds are not prepared to part with it – and that’s a comment that applies to every aspect of today’s economy.

No one, it seems, is prepared to invest in property, buy shares, or go shopping. The cash drought is hurting the property market, the share market, and retailing.

Issues which have caused the tide to run out, exposing the naked swimmers, range from the global (European recession, US slowdown, and sluggish Chinese growth) to the local (tax increases and a deeply unpopular federal government).

What that boils down to is a time when most people have parked their cash somewhere safe, waiting for the uncertainty factors to fade, and for the Gillard government to do the right thing by the country and disappear.

The problem is that the disappearance of Julia Gillard is likely to take as long as another famous Australian woman, Nellie Melba, who took about 10 years to retire, making countless returns to please her fans.

There’s not a lot that can be done to help the small end of mining where “top up” cash raisings have been sprouting ahead of the dreaded June quarter filings which might reveal a degree of financial nakedness.

It might also be a struggle at the top end of town where Rinehart has a family ownership issue to resolve, as well as placating banks which might be concerned about forecasts of a coming iron ore price contraction.

Tinkler, too, will face a spot of heavy lifting as he explains why $5.20 is a fair price for a company which last traded at $3.45, and that the extra 50% being offered can be justified for a business producing a product which has fallen sharply in price over the past 12 months.

For investors with delicate constitutions, Dryblower suggests that now might be a good time to look away as some of the naked swimmers are exposed by the tide.

This article first apppeared in ILN's sister publication MiningNews.net.