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Minews Story
Date: March 21, 2006
Croesus Crucified As Easter Nears

By Our Man In Oz

Out of the frying pan, into the fire. If ever anyone needed a demonstration of that old saying they should take a look at the position Michael Kiernan has found himself at the Australian goldminer, Croesus Mining. Called in late last year to save Croesus from its status as a perennial underperformer, Kiernan has discovered that one of his options is to treat the company like a sick dog and put it down. Whether he takes that route will be known by the end of March, but no one should doubt his capacity to pull the trigger. It’s only 10 years since Kiernan rescued an equally troubled business called Consolidated Minerals, only to run foul of impatient institutional investors who made life intolerable by haggling over his pay. With rude names being tossed around by both sides at ConsMin Kiernan gleefully took up the challenge and prepared to switch his focus from base metals to gold – only to discover that Croesus had “simply gone off the rails” with a “thoroughly lousy mine plan” and a bank-imposed hedge book which was throttling the business at a time of high, and rising, gold prices.

Famous for his ripe language, imposing stature, and take-no-prisoners approach to management, Kiernan came out swinging when Minesite caught up with him just after Croesus called for a trading halt in its shares. “We’re looking at three possibilities,” he said. “Just trading on and fixing it up, to closing the Harlequin mine and only producing from Bullen, to closing the whole lot down and doing some exploration to get a significant reserves in front of us, not this bloody donkey stuff they’ve got where they exist from day-to-day.”

The problems at Croesus came to head last week when the company reported a loss of A$27.38 million for the half year to December 31 on revenue of A$45.1 million. Worse than that, it didn’t look like getting any better with the business struggling to deliver a required 10,000 ounces of gold a month into its hedgebook which had been structured with Macquarie Bank. Recent output has been around 7000ozs a month, with costs soaring to around A$800/oz. “Clearly we had a mine plan which was rubbish, and a hedgebook which was killing us.”

Asked to point the finger of blame at someone and Kiernan resists. His position is as the newly-appointed chairman and he sees that role as a rescue agent rather than an executioner, for now. But, he is not wasting any time in making sure that all interested parties know what’s going on. “I’ve said there are five interested parties in this,” he told Minesite. “There is the company and its shareholders, the staff and the local community, the shire of Norseman (the local council), the government of Western Australia, and Macquarie Bank.”

That final mention of Macquarie prompts Minesite to ask the question on the market’s lips: “Was the banking and hedging package sold to Croesus too onerous?”. Kiernan pauses, and then shifts into top gear. “Mate, you know, even our children would know the answer to that one. They (Macquarie) lent ‘em A$13 million, which is not bad, they were issued an immense amount of options, 36 million at A41.6 cents, they also wanted total security over the exercise, they also wanted their gold hedged, and the average hedge was around A$550-to-A$560 (an ounce).”

Minesite points out that this hedge position is now around A$200/oz out of the money. “Heh, and guess who’s getting that,” said Kiernan. “Sure, they would have laid that off, but they would have laid it off and kept half the bloody profit.” Kiernan repeats the detail of the financial structure, and adds “it’s brought them (Croesus) to their knees.” Why did Croesus enter into that arrangement? “It was the last gasp of dying man,” he said.

Kiernan said Macquarie was now working with Croesus to restructure the onerous hedge book, a sign that no-one wants to see him pull the trigger and hand the company to an insolvency specialist. However, it is significant that Kiernan and his fellow directors have taken professional advice about whether Croesus can be deemed a going concern, a critical step in a litigious world where directors walk on egg shells. Right now, the business is deemed to be solvent.

A question left hanging is when did the severity of the problems become obvious, and the answer from Kiernan’s perspective is not long after he joined the board. “My first board meeting was in December, and it was obvious to me that we needed a fresh look at the mine plan,” Kiernan told Minesite. “We had a special board meeting in January, and I just wasn’t satisfied, so I called in a consultant, Barry Cahill, to investigate. I said Barry, go out there and tell me what you really see. He came back and said it would be tough, but it could be saved. I said fine, go and do what you have to. We started to get Bullen in shape, but the problems at Harlequin were horrible, absolute rubbish.”

“Cahill was horrified with Harlequin. The plan was based on using fairly inaccurate exploration drilling, and on mechanised mining in a narrow vein environment. When they tried to implement the plan they found how narrow. It was an air-leg job. Compounding the poor mine plan was the appalling hedge position where they had to deliver 10,000ozs a month. Bullen could do 4000ozs, with the plan showing they would get 6000ozs out of Harlequin. If they can get half of that they’ll be lucky, and that’s the track record. Cahill said in a note to me yesterday that either the management didn’t know, or chose not to know.”

As well as calling in Cahill on the mining side, Kiernan has acted on the banking issue. David Macaboy, who worked with Kiernan at ConsMin, has joined the Croesus board and been given the job of negotiating with Macquarie. “He has renegotiated the gold delivery times, but it’s still not enough to deliver into the hedge,” Kiernan said. “So, what we’ve done is call a trading halt. I want to deliver all the message once. I don’t want it drifting out into the market and people will vote with their feet in an uninformed position. I’ve spoken with Mark Creasy, he’s the major shareholder, he’s not happy, but he’s accepted the lot in life.” Kiernan said one of the most concerning aspects of the Croesus position was the way a parallel could be drawn with the failure two years ago of another Australian goldminer, Sons of Gwalia. “They simply don’t have the ounces to deliver to the hedge they’ve gone into,” he said.

Kiernan said there was no doubt that Croesus had good orebodies at Norseman. But, he adds just as certainly that “I’m not going to do this myself”, referring again to the five involved parties. “I’ve been to see John Bowler (WA’s Minister for Mines) and said this is the story, and he went into a foetal position and said 250 people are going out of work,” Kiernan said. “No, no, no, no, I said, if everyone works together we’re fine. It’s not in Macquarie’s interest to chuck the towel in, though you never know what Macquarie will do.”

Time is critical in this rescue attempt. Kiernan has been telling everyone involved that he wants all reports in by the end of March.

Tick tock, tick tock!

Companies featured in this Story
Consolidated Minerals Ltd (ASX,AIM,FSE-CSM)
Croesus Mining NL (ASX-CRS)