Gold price crash costs Chinese miner in Australian investment gone bad

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Western Australia’s historic mining town of Coolgardie, 550 kilometres east of Perth, was put on the map by one of the world’s biggest gold rushes back in 1892.

It has seen many fortunes won and lost over the years, but perhaps nothing on a scale quite like WA gold miner Focus Minerals.

At one stage, Focus was Australia’s fifth-largest gold producer but saw its costs spiral out of control in what could now be a timely reminder for the sector.

In September 2012, at the peak of the mining investment boom, China’s Shandong Gold International Mining Corporation bought 51 per cent of the Perth-based miner for $225 million.

In the space of a few months, the Chinese watched their investment implode in spectacular fashion, amid the worst gold price crash since the 1980s.

For Shandong, which is 35 per cent owned by the Shandong Provincial Government, it was the company’s first investment in Australia and one of its biggest outside China.

Hindsight is a wonderful thing and, in a lot of ways, the deal made sense.

Gold price crash came at worst possible time

China is the world’s biggest gold producer with an estimated 340 tonnes in 2017 and Australia the second-biggest with 301 tonnes for the year, according to Melbourne-based mining analysts Surbiton Associates.

The Middle Kingdom’s love affair with gold is almost endless — they treat it as a safe investment with many of their middle-class stashing jewellery and bars under their beds for years.

From various conversations with Chinese mining executives, it seems the rationale at the time of the Focus deal was simple: why buy gold bars for $1,800–1,900 per ounce when they could buy Australian mines and ship the gold home to China far cheaper?

Focus was the largest landholder in the Coolgardie gold belt, controlling 450 square kilometres of prospective tenements in an area that had produced more than 2.8 million ounces from 26 mines.

In a letter to shareholders in October 2012, Focus’s then-chairman Don Taig described the deal as a “step change” in the way the company was funded, valued and perceived in the global market.

“There are many examples in the market of previously poor execution by foreign investors and I think Shandong Gold have thought very seriously indeed about the model for success,” he said at the time.

The Foreign Investment Review Board (FIRB) signed off and an independent expert BDO Corporate Finance called the deal “fair and reasonable”.

The problem with commodity prices, however, is they can change dramatically overnight.

And they did. In September 2012 when the Shandong deal was announced, the Australian dollar gold price was around $1,740 per ounce.

By July 2013, it was trading at $1,350 an ounce and hundreds of workers were out of a job as Focus shut its Coolgardie mines and its Laverton operations, 350 kilometres to the north east.

For Shanghai Stock Exchange-listed Shandong, it meant the Chinese would be taking a hit of around $140 million from their first Australian venture. That hurts in anybody’s language.

Gold has since recovered to $US1,306 an ounce, which is about $A1,842, helped by the Australian dollar falling from around parity to near 70 US cents over the period.

In Australian dollar terms, it is roughly back where it was when Shandong made the investment in the first place.

Proposed sale price compounds huge loss

This week, Focus CEO Zhaoya Wang was “excited” after agreeing to sell the Coolgardie project for $40 million — less than half of what it was valued at in 2012.

In fact, BDO Corporate Finance estimated the fair market value of the Coolgardie project to be in the range of $70 million to $110 million, with a preferred value of $85 million.

The sale negotiated with Australian gold miner Intermin Resources, which has a five-month exclusivity period, comprises $31 million cash and $9 million in shares so Mr Wang was “excited” about possibly retaining some exposure.

But to state the obvious, it will take something miraculous for the Chinese to recoup their initial investment.

Records show Focus had $10.4 million in the bank when former CEO Campbell Baird orchestrated the September 2012 deal with Shandong.

At that stage, Focus had two underground mines and two open-pit mines at Coolgardie along with the Three Mile Hill processing plant, which had been recommissioned in 2009 and had an estimated replacement value of about $100 million.

The bank balance swelled to $225.8 million in the December 2012 quarter following receipt of the Shandong cash, but things went pear-shaped rather quickly.

It was costing Focus $1,893 an ounce to mine the precious metal in the March 2013 quarter — so with gold trading around $1,350 an ounce they were losing money every time a shovel dug into the ground.

Most agree the Chinese had only one choice — to shut down.

Once the decision to close the mines was made, the extent of the damage to the company’s “war chest” was revealed.

They had haemorrhaged more than $120 million but still had $116.7 million in the bank as at September 30, 2013.

Will Focus consider restart or head for exit?

Over the past few years, Focus has spent millions more on exploration drilling, paying rent on its landholdings and a feasibility study on a possible restart at Coolgardie — likely to cost $53 million.

The coffers, according to Focus’s latest filings with the ASX, are down to just $42.5 million.

The miner has stated it is now focused on “progressing” its mothballed gold mines at Laverton, which were valued at $34 million by BDO in 2012.

The question now is whether it will be a case of once bitten, twice shy, or will the Chinese celebrate the year of the pig by restarting their Laverton mines or sell like Coolgardie?

Shandong’s troubles have certainly not put off other Chinese investors, though it is a cautionary tale among mining executives.

The latest FIRB figures show China was Australia’s biggest source of overseas investment in the 2016-17 financial year, sinking $7.3 billion into mineral exploration and development.

And given the success other Chinese miners Norton Gold Fields and Minjar Gold have enjoyed in WA, having another crack at mining is not out of the question for Focus.

But it would be one of the biggest comebacks in WA corporate history.