Darnbrough: How has the market changed for the minerals industry in the last six months?
Kuchel: For most mining companies in South Australia it is generally a very positive atmosphere. Most have mines that have either world class deposits or have low operating costs, making them economical despite current commodity prices.
For those up and coming miners that do have a deposit, they will be forced to watch their dollars, as there will be problems with capital raising and cash flow, except for a few with significant foreign backing. Obtaining finance for projects may also cause delays for miners. Many will also have to seek overseas investment even though this may not have been a part of their initial strategy.
Financing and cash flow may cause their projects to be delayed slightly, however, South Australia is still expectant that it will have 40 mines in production by 2020, up from the current 11 mines.
The good thing for those currently going through the approvals process is that once they start producing, they will be producing in to a marketplace that is stronger than what it is today and commodity prices will almost assuredly be up.
For those exploration companies that do not have deposits, the next few years will certainly be a time of belt tightening, until such a time arises when it is possible to once again raise capital. That said, there is a new level of Asian interest in investing in early stage exploration ventures.
Darnbrough: Do you expect commodity prices to rise again in the near future?
Kuchel: Yes, in fact, South Australia in particular continues to garner a lot of interest from China. Many Chinese companies are interested in investing in South Australian mines and mineral deposits.
The general consensus that we are receiving from Chinese companies is that they are keen to do business here in the first half of 2009. At the moment, the Australian dollar is down (as are commodity prices) and this is the ideal time to invest. They seem to be of the opinion that if they do not invest now, the opportunity to buy into resources companies at a relatively low price will have passed them by. This appears to be premised on a strong belief that demand will rise strongly in the second half of 2009.
Darnbrough: What are the major trends and variations in the market that you would expect to see over the next 18 months and beyond?
Kuchel: I think we will continue to see a broad range of interest in exploration and mining. We are certainly very strong in copper, gold, silver, uranium, mineral sands and we will see our iron ore industry emerge in the medium term. We are still pressing ahead with the proposed bulk commodities port at Port Bonython. The final determination on whether or not the Port will go ahead will be determined by the end of February 2009. By this time, the state will also have a better idea as to whether or not the junior iron ore miners can provide the necessary throughput.
Darnbrough: What happens if Port Bonython does not receive the necessary throughput?
Kuchel: I think it is a matter of risk. If the risk of not receiving the necessary throughput is low, they will be able to gather the necessary funding for the project. However, if the risks associated with the port are too high for the private sector, the Government will need to look at the medium to long term use of the Port and determine whether or not it is a sound project over a the longer term. Of course not proceeding would significantly stifle iron ore and other bulk commodity operations from proceeding in South Australia which would have a large negative impact on the growth of the South Australian economy.
The story of Port Bonython is similar to that of the chicken and the egg. It is more difficult for junior iron ore players to raise the necessary finance to begin production if there is no economic port from which to ship the iron ore. Similarly, it is hard for the Government to justify spending money on a bulk commodities port when they do not have a range of junior iron ore miners already in production.
Darnbrough: What are the key risks for businesses moving into this period of slowing economic activity?
Kuchel: Rasing capital is the number one issue for all companies seeking to construct their first mine. However, interest from overseas investment continues to provide opportunities in this regard. On the other hand, if you are a junior explorer, you want to be spending money on tenements where the likelihood of proceeding onto development is relatively high and where other impediments, such as Government red tape is low. This generally places Junior explorers with tenements in SA in a good position as we have a rich mineral endowment which is only now beginning to be realised and we have been recognised by the Fraser Institute and others as being amongst the top 2 to 4 mining jurisdictions in the world for prospectivity and doing business.
The good news is that despite a small drop in the most recent quarter exploration expenditure results, SA has lifted its share of national exploration expenditure.
Darnbrough: Are those the actions you expect junior explorers to take as they move to mitigate potential risk to their businesses?
Kuchel: As there is an obvious lack of confidence in the share market as a whole, junior explorers will find it difficult to raise capital over the next year or two, or perhaps even longer. For this reason, they will take a critical look at all their expenditure and I believe they will spend it on those tenements where they have the greatest opportunities, both to find an economic resource and in locations where there is less sovereign risk. This is good for Australia and in particular South Australia.
Darnbrough: It is obvious smaller companies are greatly affected, but what about the larger companies? Do you think they are able to just push through these times and wait for the light at the end of the tunnel?
Kuchel: The steady performance of mining in South Australia has not produced the financial pressures on wages and contracts to the same extent as Western Australia in particular. Predominantly, South Australian mines are either world class in terms of resource quantity and grade or are low cost operations. Either way, companies in South Australia are well placed to ride out the next 12 to 18 months. This of course is also good news for the growing support industry for mining in SA.
Darnbrough: Are there still opportunities in an economic climate such as this, and if so, what are they?
Kuchel: Any significant change in the market place brings with it a plethora of opportunities. For the mining companies that are cashed up, there will certainly be significant opportunities. There will be opportunities for equity deals, outright purchases of companies or portions of a company’s portfolio. I think we will see a higher than normal number of mergers and acquisitions over the coming 18 months.
As the commodity prices drop, we see a lot of marginal mines close, and that tends to constrain supply. When demand goes up by a relatively small amount (given quite a few mines have been forced into closure) the companies that have been able to ride out the storm will be better placed to provide their product and perhaps increase outputs into a supply constrained market.
There are a lot of positives to take from this economic down turn. For one, it gives mining companies and Governments alike the chance to have some breathing space, put in badly needed infrastructure, and deal with issues such as skills development, climate change, land access and water.
The South Australian mining and energy sector sees this as an opportunity to get ahead of the game because very soon, mining companies will find themselves in the same position they were in a few months earlier – in the midst of a skills shortage.
Darnbrough: What advice would you have for mining and minerals professionals as they move in to 2009?
Kuchel: It is important that miners and investors alike do not take their eye off the fundamentals. The fact remains that there is still very strong demand from the emerging BRIC economies and this will continue to grow over the next two to three decades. One would also expect that Governments around the world will take this opportunity to better regulate their financial systems and hence create more robust economies, hopefully avoiding the collapses that we have seen over the last few months.
I think that we can also take some comfort in a relatively consistent message that we are receiving from China and that is that they wish to invest in Australian mining over the next six months before commodity prices and the Australian dollar begin to rise again.
I wouldn’t be bold enough to predict whether we have yet seen the worst of the financial crisis, that said, however, I do believe we will see commodity prices rise in 2009. My advice would be to remain positive and invest wisely over the coming months in preparation to take maximum advantage when strong demand returns. This is an opportunity for the Australian minerals industry to increase our share of global mineral sales. How companies prepare themselves now will make all the difference in the future.