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Mar 2004 - New Mining Cycle

Just like old times as the new mining cycle increases its pace

Bobby Godsell, the MD of Anglogold commented at the INDABA 2004 Conference in Cape Town that mega mergers are over for the time being, which is probably true for the time being apart from perhaps Newcrest possibly being taken over once Telfer is in production.

The last gold mining company cycle has taken about 15 years to complete, from IPO’s to exploration to discoveries to mergers to takeovers to gone, or swallowed by even bigger fish, and back to IPOs again. Post crash in 1988 there were about 6 to 10 Australian gold producers, which by 1990 had increased to about 20 or so as Boddington, Big Bell, Bounty, Cosmo Howley, Fortnum, Granny Smith, Higginsville, Misima, Moline, Mt Morgans, Plutonic and Porgera had all started production (there were probably some others too, but those are the ones that we can remember). By 1993, there were about 30 Australian listed gold producers with mergers already starting as in Plutonic taking over Forsayth, and by 1994 there were about 40 Australian gold producers.

And now we have dropped back to about half-a-dozen Australian gold producers or so again (after the major offshore gold companies took the merged companies over), with a whole raft of exploration discoveries coming through, except that this time it is not just “gold”, it is all the base metal and ferrous commodities, and in a range of different countries too.

Although some companies fell by the wayside, almost any form of company exploration “model” appeared to work, from discovery to cast-off by the majors, including those that were base, then gold, then dot com, then biotech and back to gold exploration, with a few name changes along the way.

It is logical that the large companies re-examine their merged portfolios and decide what to drop or sell because it no longer “fits in” either due to size or location to warrant the management time to continue to run it. Sometimes such cast-off operations are taken over sooner rather than later, however the Hill 50 cast off by WMC had a spectacular 3-year or so growth increasing in value from $15m to $225m before it was taken over by Harmony, and so far Agincourt (being the old Wiluna) appears to be making spectacular progress.

In the current cycle, Tanami is expected to bring the Coyote discard of Anglogold into production and offshore, Pan Australian should be able to bring its copper-gold Phu Kham in Laos into production (previously a Normandy exploration target), Albidon may be able to start Munali Ni-PGM in Zambia, and Terramin may be able to re-interpret Menninnie Dam for zinc in South Australia.

While some majors formed subsidiary companies, they often took them back again at a later date. Homestake took over the Homestake Australia that it formed as did Placer Dome takeover the Placer Pacific that it listed. Even North Flinders was eventually taken over by Normandy/Newmont. There are some exceptions such as Newmont not taking over Newmont Australia which became Newcrest, although that can still occur, and Highlands still exists out of MIM. Goldifields (out of Renison) was taken by Delta Gold, but then the senior joint venture partner often does take over their junior partner.

Reflecting back, almost every joint venture has resulted in the smaller company ultimately being taken over by the larger company, something that is still occurring as in the recent takeover offer by Durban Deep for Emperor. There have been numerous examples, Delta Gold became successful in its own right on 40% of Granny Smith before eventually being taken over by Placer Dome, after it had formed Aurion by merging with Goldfields and became a tasty morsel that could no longer be ignored.

Such takeovers in joint ventures are not confined to gold producers, Implats gradually took over Zimplats and it appears is still trying to mop up the outstanding residual shares. It is probably just a matter of time before Implats takes over Aquarius too. Perhaps that is the fate that awaits Abelle - to be taken over by Harmony; Durban Deep by Placer Dome, or even Minotaur by Oxiana.

Some companies found new mines, closed them, opened others and are still operating, such as Resolute which reputedly had the whole of the Marymia field, selling the western half to Great Central who discovered Plutonic and sold it to Plutonic to use the monies to form the Yandal field. Resolute continued with the eastern half and delineated Marymia in joint venture with Titan, then took over Samantha (who under Nick Giorgetta had Higginsville), and found Chalice along the way before diversifying into Ghana and Tanzania where it has survived and revived.

However, survival of a cycle is no guarantee of continued life as we saw with Metana and even Dominion is a shell of its former self, although Challenger continues to make progress.

A cycle does see new discoveries being developed quite often through taking a different perspective on previously worked areas or near old workings such as Gallery Gold’s Mupane in Botswana, Troy near Sandstone, or Degrey at Indee.

While a number of the really old fields are coming back into production such as Walhalla by Goldstar and Hill End (by Hill End), old workings and fields does not have to mean a long time ago. A number are expected to come back into production that were closed in the last cycle such as Cosmo Howley by Northern Gold, Gabanintha by Reward Minerals (a new IPO), Fortnum by Gleneagle, and Wirralie by Ashburton. There are undoubtedly likely to be others too such as possibly Chalice by Bullion, and enough companies appear to be tackling Higginsville, while Boddington surely has to somehow or other be on the cards to reopen.

Not all old goldfields are likely to be reopened successfully, some of the difficult ones can remain difficult until the geological “key” is discovered, such as Melita and possibly Mt Gibson.

Then there is offshore, this time it is China, Laos and possibly even Vietnam (last time it was PNG, Malaysia, the Philippines and Russia). In Africa, Zambia, and the DRC have been added to Ghana and Tanzania. Albidon has some interesting properties in Tunisia, which is a country in North Africa that does not appear to have received much attention. Also as Albidon point out, Africa appears to have been barely touched when it comes to nickel sulphide exploration, but that interest is beginning to increase with Barrick/Falconbridge’s Kabanga joint venture.

Just how many new gold mines and other commodities’ mines will come into production in the next three years or so to restart the cycle remains to be seen, but the scene is set for a hectic pace of activity in the early stages of a new mining company cycle.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is an Authorised Representative with Taylor Collison Ltd, and with his associates, holds interests in a number of the stocks mentioned in this article. The opinions expressed in this article should not be taken as investment advice, but are based on observations by the author. The author does not warrant the accuracy or completeness of any information and is not liable for any loss or damage suffered through any reliance on its contents.

  • Written by: Keith Goode
  • Monday, 01 March 2004