Executive Outlook Series – Paul Dowd

DARNBROUGH: How has the market changed over the last six months or so?

DOWD: It has changed in two phases. Six months ago, the market was very tight for capital equity markets. Very few raisings had been successful. In relation to debt funding, in theory it was still available, but there were not too many projects seeking debt so it is hard to gage just how available that was.

Then the sky fell and everything changed. The equity capital markets are not just closed, rather their doors are bolted and are going to stay that way for quite some time. Equity capital is virtually unavailable for junior explorers in this current environment and that will lead to a massive annihilation within our industry.

DARNBROUGH: What are the major trends and variations in the market that you would expect to see over the next 18 months?

DOWD: Most juniors had been hanging out for a change in the market’s sentiment before they went out to raise additional capital. In many cases, they were really starting to run on empty with very limited cash reserves. However, instead of getting relief, they were hit with a train coming in the other direction. Those small juniors will now be unable to raise the necessary capital just to stay alive.

With a burn rate for a junior in the order of about a million dollars per annum just to maintain existence, many juniors will be out of business by the first or second quarter of next year.

DARNBROUGH: What will this mean for the mining industry?

DOWD: It’s never going to be good. It’s part of an ecosystem. You need the elephants in the jungle knocking down a pathway for the juniors to follow. It is often the juniors who discover the big ore bodies and are forced to bring the elephants back and point them in the right direction. You can not take the seniors or the juniors out of the industry and expect it to still operate normally.

I think we are in for a serious period in the industry, particularly with regards to discovery.

If you stop exploration, you effectively fracture the mining cycle.

We found it so difficult when the super cycle began to turn on that discovery tap. The expertise was not there, a lot of the corporate history had been lost and we were going back and starting a process all over again, reinventing the wheel so to speak.

We never recovered from that and, on top of all of this, the current international financial crisis has hit us at the same time.

I predict that the industry will do what it always does when it is worried, and that is stop exploration and start laying people off.

We can not afford to fire people from the industry. However, it will happen and I predict the consequences of yet again “fracturing the mining cycle” will be dramatic.

We have not made any major discoveries in the last 10 to 15 years, rather we have been relying on operations we discovered a long time ago. I think the Australian mining industry is in for a serious readjustment.

From a positive perspective however, if a large majority of juniors go out of business, their assets are likely to be re-distributed to those explorers left standing.

This may change the risk profile for investors. Investors may perceive the junior exploration sector to be an attractive (though still high risk) investment.

The immediate outlook does appear gloomy, however, with some basic restructuring there could be quite a few benefits to those explorers who remain.

DARNBROUGH: For those junior explorers who remain what actions do you expect them to take in this market as they move to mitigate potential risks to their business?

DOWD: There is not a lot they can do, except, preserve the capital they currently have. If you look at all the junior explorer companies, they have been valued at less than their cash backing.

The market appears to be saying “…do not want spend money searching for commodities the world doesn’t want”. However, this is the wrong perspective to have. The total need for commodities hasn’t changed.

The time frame may have changed, but, if China continues to grow at 8 % (and it has virtually guaranteed that it will) and India continues to grow, then just those two countries will continue to demand certain commodities.

Even the OECD has said that Australia will continue to grow.

I am a great believer that we are still in this supercyle.

We are just seeing a correction in the cycle that, once we are through, will spring back to high levels.

DARNBROUGH: Are there opportunities in an economic climate such as this?

DOWD: Yes. Those that go to the wall will have their assets sold off under a certain sale arrangement or joint venture.

Overall, there will be a shift in the possession of assets to a much smaller group of juniors and therefore those juniors that survive, that enjoy that re-distribution of assets, will be much better placed when they come out of this current situation.

DARNBROUGH: What can they expect when they come out of this current period?

DOWD: The need for cash and capital will remain. For those juniors who survive, it is vital for them to hold on to their capital because the time frame for the current crisis cannot be accurately predicted.

The junior companies that have been able to preserve their funds and continue to accumulate or acquire assets will be in a great position to continue to develop those assets.

DARNBROUGH: What advice would you have for mining and mineral processing professionals as well as suppliers and distributors in this sector as we move in to 2009?

DOWD: Try and keep your head above water.

The world will turn.

Despite the fact that we are going to go into negative growth in many areas of the world, the developing world will demand to get back to where they were heading and the need for commodities and growth will continue.

Commodities will return to acceptable levels. We have been unsuccessful with exploration in the past. Unless you have new projects coming on stream, that have fresh unit operating costs (lower than the operating costs of older projects), the average rising unit operating costs are not being diluted.

If you have rising operating costs, that eventually causes closures, which affects the demand line.

I am convinced that the mining industry is not in good shape in relation to meeting another burst of demand from developing countries.

We will see an increase in demand for commodities and an increase in commodity prices. If I was going to use an example, I would say copper is one metal that cannot continue at levels below two dollars because it will put many of the copper deposits around the world out of business.

The industry should recognise that dramatic increases in commodities do not service the industry well. Whereas, controlled increases in commodities are much better for the longevity of the industry.

DARNBROUGH: What key messages would you have for the mining audience on the economic times ahead?

DOWD: In retrospect, I see what the industry has just lived through as the first part in this supercycle.

What we were experiencing was a genuine supercycle and I believe we are still in a genuine supercycle.

The difference between a boom and a supercycle is that the industry as a whole should plan for a supercycle by improving the levels of infrastructure.

Australia missed a great opportunity by not putting in place the right infrastructure and relationships with major trading partners. A good relationship with China would have set Australia up for the future.

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