Hedging shocks yet again: Dryblower Monday, March 20, 2006 DEEP...

Hedging shocks yet again: Dryblower


Monday, March 20, 2006


DEEP down in Dryblower beats a book. There isn't a name yet, but the working title is "Great Australian Mining Stuff Ups." While there is a lot of material to work with, there are two problems with what promises to be a literature classic: When do you stop the clock because the stuff ups just keep happening, and how many really are the fault of the miners.


The latest chapter, complete with problem No. 2 looming large, is happening now. Croesus Mining, once the pride of Kalgoorlie, has called "time out", suspended itself from the stock exchange, and commenced a process that Dryblower reckons is as much fun as examining your own entrails.

While we all wait to find out precisely what went wrong at Croesus, and whether the patient can survive, there are some facts emerging from the operating room in the do it yourself ward.

Firstly, that the gold at Norseman is damnably tricky stuff. How do we know that? Well, we actually know that because a few years ago WMC sold out because Norseman is so tricky – and we also know it because Croesus thought it could use mechanised equipment in the Harlequin mine when it's a simple air leg operation chasing rich but narrow veins.

Choosing the wrong equipment and failing to do enough development work is a classic in the list of stuff ups.

But the problem that really caught Croesus in that classic Australian position, you know the one – up a certain creek in a barbed wire canoe without a paddle – is not the fault of the miners. Blame for the No. 2 problem lies with the bean counters.

How many times have we seen it in the past, and how many times will we see it in the future: financial factors, in the form of an impossible hedging program, are what really caught Croesus out.

Before Dryblower is allowed to see the Croesus details, enough information is in the public domain for him to say "we've heard it all before". The names Pasminco, Western Metals and Sons of Gwalia leap off the page that lists the problems at Croesus.

As far as can be assessed, Croesus signed up for a loan from its banks and in return offered to deliver around 10,000 ounces of gold a month at a price around $A560 an ounce. The numbers are approximate because the patient is still under anaesthetic.

There are two obvious errors in this financial structure. The failure to actually meet production targets because of the narrow veins at Harlequin and the choice of mechanised equipment, and the decision to accept a price of $560/oz when the gold price was rising and now sits some $200/oz higher.

Talk about a recipe for disaster.

Talk about history repeating itself.

Talk about the mining industry doing it again and producing a failure where nothing like it needed to have happened – and where the history books are littered with examples of mining companies failing for exactly the same reason.

Two good things might emerge from the troubles at Croesus. Firstly, that leaders of the mining industry will call a meeting with high-powered bankers and lay down some rules about borrowing, which prevent this constant repetition of disasters that so deeply damage the reputation of mining in Australia.

Secondly, that Dryblower has to broaden the scope of his book and find a new name because so many stuff ups in mining have little to do with the digging and everything to do with badly structured, and inflexible, finances.