to whom it may concern

Aust Kaolin hits the Bermuda Triangle
Friday, February 4th, 2000

A disgruntled shareholder wrote to Pierpont the other day. Mind you, Pierpont rarely hears from gruntled shareholders, who are too happy watching their bankrolls grow to bother writing letters.

Anyhow, this chap was frightfully disgruntled because he had bought shares in Australian Kaolin and it had vanished from human ken.

``The stock was suspended earlier this year after it had apparently lost support from its bank,'' he wrote. ``Information is near impossible to get, with no communication to shareholders for six months and inquiries to the stock exchange referred to the receiver and inquiries there referred back to the stock exchange. Is this a loophole in the exchange rules that only creditors get to know what is happening and not shareholders?''

The short answer is yes. The receiver is appointed on behalf of creditors. He reports to them only and has no duty to shareholders.

Shareholders can (with some difficulty and expense) access statements made by their company to the ASX, but companies that have just sunk don't make many announcements and some make none at all. So companies that go bust disappear from shareholders' view as completely as if they'd hit the Bermuda Triangle.

Actually, it's easier to explain the disappearing aircraft of the Bermuda Triangle (most of which didn't disappear at all) than the reasons for Australian Kaolin vanishing from the radar screen.

For the benefit of readers fortunate enough never to have heard of the stuff, kaolin is an industrial mineral. In processed form, it looks like talcum powder and the brightest kaolin commands the highest prices. High-quality kaolin sells for about $US200 ($315) a tonne and is used as a coating for fine papers, while lower-quality kaolin is used as filler.

Australian Kaolin had a big deposit at Skardon River on the west coast of Cape York, 85 kilometres north of Weipa. It was going to build a big plant, which would produce 175,000 tonnes of kaolin a year. Australian Kaolin said it was going to produce the premium brightness and ultrafine grades and had reached exclusive distribution agreements for Europe, Africa, the Middle East, Japan, China, the United States and Taiwan.

Investors loved the story. Australian Kaolin raised the not inconsiderable sum of $53.9 million in mid-1997 in a placement and rights issue at 30?. Two shareholders who came aboard around that time were Ralph Sarich and that legendary prospector Mark Creasy.

Australian Kaolin then arranged financing of a further $20 million from Dresdner Kleinwort Benson. Shareholders attending the 1997 annual meeting were told the company was in ``a very strong financial position''. Construction had begun on the Skardon River plant, which was supposed to be completed in mid-1998.

All jolly well, but by the end of 1997 the share price had slipped to 25?. By June 1998, the shares were down to 15? and the plant still wasn't completed. Sons of Gwalia, which has a strong presence in industrial minerals, thought it saw a bargain and spent $5 million picking up 15 per cent of Australian Kaolin in a market raid.

It turned out to be one of those bargains you'd prefer to miss. The subsequent events are in some dispute, but broadly Australian Kaolin ran out of money, with its plant still not commissioned. Australian Kaolin tried to get more money out of Dresdner, which asked for reports on the financial, engineering and marketing prospects of the company.

The financial report, by Perth accountants Taylor Woodings, said the project was facing cash-flow problems. The directors disputed that. The directors also threatened to sue Dresdner when it refused to provide further finance after reading the report.

Australian Kaolin shares kept right on sinking and hit the wall last March, when Tony Douglas-Brown was appointed administrator and Tony Wooding and Michael Ryan were appointed receivers. The shares are suspended and for all the information that has been given to shareholders, the company might as well be deep under Atlantic waters somewhere off Bermuda.

One point that is immediately apparent is that the project cost much more than Australian Kaolin had budgeted. The original price on the Skardon River project was some $61 million, of which the plant was expected to cost $47 million. This blew out by an extra few million when the $A slumped against the $US in August 1998 an event obviously beyond the board's control.

However, by the time the receiver was appointed, the $73 million Australian Kaolin had raised in 1997 was gone and creditors were owed another $10 million. After spending some $83 million, the company had run out of money. Expenditure on the Skardon River processing plant had blown out to $67 million and it still wasn't commissioned.

All new mineral projects are liable to teething problems, but Skardon River seems to have had more than its share, particularly the plant. Tony Douglas-Brown's report to creditors says one problem was in the calciner the kiln that cooks the kaolin.

Instead of letting the contract for the calciner on a turnkey basis, the directors split the contract between two or more contractors. There was a problem with the welding and some bricks in the kiln had come loose. There was a dispute over who was liable.

Another problem was the failure of some nozzles in the spray dryer. As the suppliers of both the spray dryer and the kiln had not been paid, they were refusing to fix the problems.

Another issue was the lack of working capital. Sons of Gwalia's managing director Peter Lalor told Pierpont: ``It's not like gold that you can take down the road and get a cheque for, or even sell overnight. With industrial minerals, you have to produce samples and see if they meet the buyer's specifications. You take them to customers, you argue about the price and three months later you deliver and three months after that you get paid.''

So Australian Kaolin needed working capital to carry it across the long gap between cranking the plant into production and eventually getting paid. Working capital for Skardon River was supposed to be $10 million and that was the amount Dresdner finally refused to provide because it didn't consider the project viable.

The original budget was probably ambitious in both cost and time. Skardon River is on one of the most remote bits of Australia and construction was disrupted by an unduly wet season (incidentally, the wet season means it can be mined for only 10 months a year).

After mining, the ore was to be put through a wet plant that would separate the kaolin from the bits of earth and other impurities. It would then go 18 kilometres down a slurry pipeline to a dry plant, which would convert it into fine, dry white powder. Then it would be bagged and shipped by barge to a store at Weipa.

The wet plant was completed but not the dry plant. The cash appears to have run out before adequate storage facilities could be built. Tony Douglas-Brown says the plant was supposed to produce about 450 tonnes a day, but there was only storage for 200 tonnes at Skardon River and the store it needed at Weipa wasn't available.

Peter reckoned a kaolin plant could take a couple of years running before the management could be confident of the quality and specifications of the product and even the yield (recovery grade). The clay being mined contained 92 per cent kaolin, but how much of it would be recovered in the plant was questionable.

At the end of the day, the only way of finding out was to build the plant and run it. Anyone who feels like doing this will soon get the opportunity, because the receivers have said they intend to auction the plant.

So if anyone wants to spend a lazy $20 million finding out all about kaolin, here's their chance. It sounds like the ideal project for Ralph Sarich. Or he could just send the money to the Bermuda Triangle.