Summary: The Kerry Harmanis-linked Talisman Mining is set to restart the mothballed Sinclair nickel mine after buying it from Glencore and watching the local nickel price rise. Meanwhile, Macquarie Bank is supporting Saracen’s plan to restart the Thunderbox gold mine, as gold price also lifts in Australian dollars. A number of other recent deals also cover mothballed mines.
Key take-out: This revitalisation process is likely to be repeated as the mining industry adjusts to falling costs and a falling currency.
Key beneficiaries: General investors. Category: Mining stocks.
Kerry Harmanis, the man who made $500 million eight years ago from the sale of a nickel-mining business, has re-emerged as the leading light in a “back to the future” trend that is restarting Australian mining after the collapse of coal and iron ore.
The deal which made Harmanis one Australia’s richest people was the 2007 takeover by Xstrata of Jubilee Mines, owner of the rich Cosmos mine in central WA.
Included among Jubilee’s assets was a nearby nickel discovery called Sinclair. It was Xstrata which developed Sinclair, but what happened after that has set the scene for today’s revival in a process which is being repeated across the outback.
After four years in production, and the takeover of Xstrata by Glencore, the Sinclair mine was mothballed in mid-2013 thanks to the nickel price falling to around $US6.10 a pound.
The price of nickel has crept up to $US6.30/lb, an insignificant gain of 3 per cent in US dollar terms but after allowing for the fall in the value of the Australian dollar from US92c to its current US78c the local nickel price is up by 22 per cent from $A6.63/lb to $A8.08/lb.
The currency effect, and a belief that the nickel price will rise further, has tempted ASX-listed Talisman Mining (TLM), a company in which Harmanis is the biggest shareholder, to buy Sinclair from Glencore and plan the re-start of mining.
What makes Sinclair attractive is that for a low-ball purchase price of $10 million Talisman gets a project with some proven ore in the old workings, extensive exploration targets, and a high-class processing plant that was operating as recently as 18 months ago.
Less obvious, but equally important, is the skill-set of Talisman’s staff with five executives, including its managing director, Gary Lethridge, being former employees of Jubilee and with all of them familiar with Sinclair.
In effect Harmanis, with a 12.1% stake in Talisman, has re-assembled his Jubilee team, bought an old Jubilee discovery, and is now getting ready to re-start the clock.
He’s not alone.
Conditions in Australian mining are changing with currency one of the improvements, along with a steep fall in the cost of labour and other services which have been freed up by cost-cutting in the coal and iron ore sectors.
Not far from Sinclair work is underway to re-start a mothballed gold mine thanks to an almost identical set of events.
The Thunderbox mine was discovered and developed by Canadian-based LionOre Mining, but later became an asset of Russia’s Norilsk Nickel.
Like the Xstrata takeover of Jubilee the Norilsk takeover of LionOre was completed in the hothouse conditions of 2007, roughly a year before the asset values melted in the heat of the 2008 global financial crisis.
The only differences are the commodity (gold rather than nickel) and the price. Norilsk paid a whopping $US6.25 billion for LionOre after a bidding duel with Xstrata.
Thunderbox did not operate for long under Norilsk’s nickel-focussed management with the goldmine mothballed at the end of 2007, which is where it has been ever since.
In hindsight, Norilsk made a serious mistake abandoning Thunderbox because not long after it was placed in care and maintenance the gold price started its spectacular run from $US836 an ounce in late 2007 to its peak of more than $US1900/oz in early 2011.
Saracen acquired Thunderbox from Norilsk early last year for $23 million and has just finalised a mine re-development plan which should see production re-start by the middle of next year.
As with Talisman’s Sinclair nickel mine one of the key drivers of Thunderbox is the falling value of the Australian dollar which has helped lift the local gold price above $1500 an ounce, high enough to ensure a profit margin on every ounce produced of close to $500.
Saracen’s plan, which is being supported by Macquarie Bank, is to extract an estimated 597,000 ounces of gold over a 4.5 year campaign from a widened and deepened open pit mine.
The all-in production cost is estimated to be $1032/oz with a Macquarie-organised gold-hedging program for 140,000oz at $1520/oz, an insurance policy which should ensure the success of the project.
What Saracen is doing at Thunderbox is a mirror image of what has happened repeatedly in the Australian goldmining industry over the past 40 years with every re-start being traced to a combination of the gold price, focussed management and a willing bank to provide a hedging program.
Missing from that equation over the past few years have been the beneficial effect of a competitive currency, reasonably-priced labour costs, and banks willing to underwrite projects.
Another problem for companies trying to develop base metals mines (nickel, copper and zinc) or precious metal mines (gold and silver) is that the boom in iron ore and coal captured most investor attention.
The deals on Sinclair and Thunderbox are examples of how overlooked segments of the Australian mining industry are being regenerated.
Other recent deals of interest covering mothballed mines include:
- Blackham Resources planning the redevelopment of the Wiluna goldmines in central WA, a region with a history dating back to the 1890s.
- Kin Mining planning the redevelopment of the Leonora goldmine.
- Tanami Gold and its mothballed assets in the remote Tanami desert where WA bumps into the Northern Territory, becoming the target of competing takeover bids from Metals X and Northern Star.
Gold is the most popular metal in the revival process thanks to the obvious the ease in selling (and banking) a product which doubles as a currency.
However, the currency effect is beneficial to all commodities produced in an Australian cost environment and sold in US dollars.
Another important factor at work in the revitalisation process is the significant fall in local costs thanks to the release of labour and contractor capacity caused by the slowdown in iron ore and coal.
What’s started with Sinclair and Thunderbox is likely to be repeated as the mining industry adjusts to the beneficial effects of falling costs and a falling currency.