THE DISTILLERY: Miner fatigue

Jotters chew over the declining prospects for the mining sector, while others tackle the ongoing Billabong debacle.

Two commentators from the Fairfax newspapers have got their hands on reports that reflect rather poorly on the trajectory of Australia’s mining sector. One of them indicates that the boom was starting to cool months ago. Meanwhile, another three examine the lightened dance card of Billabong International, with two concluding that it mightn’t be just the embattled retailer that’s embarrassed.

Fairfax’s Adele Ferguson has got her hands on a report that points to a construction industry indicator that shows the mining boom was starting to ease well before BHP Billiton and Fortescue Metals Group announced their project deferrals. This was going on way back in March-June.

"A survey of 20 of the country's biggest construction companies reveals that work won in the mining sector dived a huge 27 per cent in the June quarter. In dollar terms, this represents a downturn in mining work from $27 billion in the March quarter to an estimated $19 billion in the June quarter. In the March quarter last year, work won was more than $30 billion. The figures, released to this columnist by Infrastructure Partnerships Australia and forecasting group BIS Shrapnel, put into perspective why most mining services companies will have to follow the lead of Boart Longyear, Macmahon Holdings and NRW Holdings and lower earnings guidance for 2013.”

Fairfax’s Malcolm Maiden has also flipped through a mining industry-related report, this one from the Mineral Council of Australia, released this week. While the writer admits the material is undoubtedly self-serving for the council, it also speaks of the vulnerability of Australia’s golden age.

"Resources sector construction wages that account for between a third and half of mine development costs grew by 9 per cent a year on average in the decade to 2011. Engineering wages here are 60 per cent above the world average. Six years ago, 63 per cent of our thermal coal production was on the bottom half of the global cost curve. Now only 28 per cent of it is. The cost to build an extra tonne of iron ore capacity was $US61 a tonne here in 2007, and $US73 a tonne in the rest of the world. Now is it $US195 a tonne, and the rest of world average is $US150 a tonne. The response? Get project development and operating costs down, and returns up to a point where investment is sucked in, the MCA says. It says the miners are already working to reduce costs (they should be, after writing blank cheques during the boom to expand capacity), but says micro-economic reform is also needed. It is at that point that the dimensions of the problem emerge.”

Meanwhile, the big corporate story to come out of yesterday was the abandonment of Billabong International by one of its private equity suitors, widely reported to be Bain Capital.

Fairfax’s Elizabeth Knight explains how much weaker Billabong is with just one private equity suitor interested in a $1.45 offer, as well as how far valuations have fallen for the company.

"A single-buyer auction is about the worst place for any seller – particularly if the asset is a dilapidated business. Billabong has become an international house of brands – some of which are travelling better than others and the best of which have been sold off to redress balance-sheet issues. Its iconic Billabong brand has been under pressure and its business model has been called into question. The major shareholder Gordon Merchant (with 16 per cent) rebuffed a golden opportunity to accept a more generous offer from TPG of $3.30 in February.”

The word most widely used to describe the news for Billabong was "embarrassing”. But as The Australian’s John Durie argues, there could be some egg on the face of Bain as well.

"Big private equity houses like Bain are full of smart professionals so it beggars belief that it did such little due diligence prior to its grand entry and was forced to walk at first sight of the books. Maybe the thing that made them exit is so shocking. We will understand the reasons when TPG also walks, but given that Billabong has just done a capital raising, we can only assume that Kunkel isn't hiding any secrets.”

Business Spectator’s Stephen Bartholomeusz flat out questions the immediate assumption that Bain took one look at the books and fled.

"That isn’t necessarily the case. TPG has been stalking Billabong since the start of this year and would know the company as well as anyone outside of it and it’s still there and is still conducting a due diligence process that self-evidently is more exhaustive than Bain’s, given that it both informally and formally started earlier and is continuing. TPG also has a lot of experience with retail businesses, here and offshore, to draw on and may be more comfortable that it can execute a turnaround and extract the considerable upside latent within Billabong than Bain, even in a global economic environment studded with significant risks. Certainly, in two weeks Bain couldn’t have collected the insights TPG would have into the business.”

In other corporate news, Fairfax’s Adele Ferguson isn’t surprised that CVC Asia Pacific managing director Andrew MacKenzie is moving on. While the private equity executive has had a few wins in Australia, the CVC business here is dogged by three particularly bad investments that MacKenzie has presided over – Nine Entertainment, I-Med and Stella/Mantra.

The Australian’s Bryan Frith takes his readers through the complicated structure that Singaporean gaming billionaire KT Lim has had to engineer to keep his hands on a stake in Echo Entertainment.

In domestic economic news, Fairfax’s Eric Johnston delivers the findings of the International Monetary Fund glance at the Australian banking sector.

Admittedly, they’re rather predictable – ‘Gee, it’s rather large and borrows an awful lot from overseas’.

Alright, enough unfair teasing. The Fund puts its neck out to say that the sector could cope with a US-style housing collapse.

The Australian Financial Review’s Jennifer Hewett starts what The Distillery hopes will morph into a growing discussion about what private equity actually does and why the stereotype about the slash-and-dash play doesn’t help anyone.

On China, Fairfax’s Asian affairs reporter Peter Cai says China’s latest manufacturing data shows the sector has stabilised, but there’s no firm sign yet that it will return to the levels seen a year ago. And The Australian’s Glenda Korporaal engages in an interesting discussion about political science pertaining to revolutions, specifically China.

Finally, The Australian Financial Review’s Chanticleer columnist Tony Boyd has spoken to Michael Thawley, former Australian ambassador to Washington and now political and economic adviser to Capital Group. Thawley says that, despite the aggression that’s obvious to all in US politics obscures the not-so-obvious consensus between the two parties that spending needs to fall and taxes need to go up.


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