Better projects, not bigger the best

THE CONFERENCE CALLER: When considering what happened to investment interest in the junior mining sector many focus their gaze outwards.

At the RIU Sydney Resources Roundup Blue Ocean Equities executive director Rex Adams turned his inwards.

“What went wrong?” he asked. “Why has the sell-off been so savage?

“One thing that went wrong, is the mining industry generally – and I’m talking about the smaller mining industry – didn’t provide the real investment returns to investors.

“There were a handful of iron ore producers, and to be fair, a handful of nickel producers.

“Everything else has largely been an investment boom and not much in the way of an earnings boom.”

 

Adams identified a number of reasons contributing to this lack of investment returns to include:

The strength of the Australian dollar;

Cost flow through from iron ore / coal / LNG expansion;

Energy and fuel costs;

A decline in commodity prices; and

Too many poor quality projects.

“The big rally in the Australian dollar really impacted revenues for everybody,” Adams explained.

“Unfortunately the iron ore boom, the coal boom, and the LNG boom – all the investment that came off the back of these had very large cost impacts across the industry and those costs flowed through into everybody else’s infrastructure.

“Fuel costs had an enormous impact –at the beginning of the decade (2000s) the oil price was around $US a barrel, at $US100 a barrel that energy cost has flowed through almost every input into the mining industry, not just as fuel but as every supply that goes in with an energy cost attached to it.

“Finally, too many companies were chasing too many poor quality projects.”

Adams suggested the industry can’t rely on rising commodity prices to drag it out of the gloom.

He listed off a string of current prices saying he thought they were now pretty good: copper – around $3 per pound, nickel – enjoying a recent run to around $9 per pound, lead and zinc – trading in the region of 90 cents to $1 per pound, gold hovering around $1300 per ounce, and iron ore managing to hang on to the magic $100 per tonne.

“If you have a project that is not robust at these prices, or a bit lower, I don’t think it is a good project,” he said.

“We have to have better projects – or make projects better.

“Some projects can be made better by re-engineering and application of new technologies.

“I think this a focus that should always have been there, but people tended to lose that focus.”

Adams said the return on capital is the most important aspect of any mining project.

Big, he suggested, does not necessarily indicate a project is better than another – even if the investment community usually expresses its desire to invest in bigger companies as it is the health of the project itself most of these institutions are more interested in.

This often leads to companies making wrong decisions as they attempt to make a project bigger than it should be in order to attract the investment dollars.

“Basing decisions on size alone and spending too much capital, often results in poor returns,” Adams said.

“Give me a smaller, high-return project any day; the high-grade zone – or what people perceive as a high-grade return – may be the real ore body, the rest of it is just smoke.”