Home' Australian Resources and Investment : June 2016 Contents tumultuous time, but it is correcting
Looking at the BHP share price
over an extended period, just very
simplistically, you can take a trend
for what we would previously call the
normal growth or normal cyclic activity
of the rst two-thirds of that graph, and
look at the effect of China on that in the
At the time, the GFC was pretty
cataclysmic, but if you look at the
effect of the GFC as measured by the
BHP share price, it was remarkably
insignificant in comparison to what
the world is now experiencing.
Fortunately for Sirius shareholders,
and the shareholders of S2, the
merger and demerger deals were done
where that little star is on the right-
hand side of slide 3, before things
really went downhill.
Whether we are now back at that
long-term normal growth trend, or
whether there is an equal and opposite
reaction still to come, who knows? But
any little explorer that is dependent on
equity funding needs to assume the
worst, and be as well insulated from the
equity markets as possible.
In the last couple of weeks, there has
been an exponentially expanding list
and breadth of things in the news that
is really perhaps at last showing that
we are nally at the point where the bad
stuff has to happen, and is happening,
in order for us to recover.
I won't go through all of the things on
the list on slide 4, because it is a very
big list. It's not just equities, it's not
just interest rates, it's not just this, that
or the other; it's across every aspect
of everything, and every metric and
measure you can think of. There is
extreme volatility and unpredictability.
Some market-savvy people are taking
advantage of that. It gets the press very
excited, as well.
Things that people wouldn't have
predicted include the Shanghai Stock
Exchange bubble bursting, and
peak oil being cheap oil, and all the
consequences of that. As ever, many of
the junior explorers are being forced to
morph into tech companies, and lithium
has superseded graphite as being the
latest commodity of choice. I think the
major consumption of lithium will not
be for batteries, but for antidepressants.
This situation is not normal. It is
What's it got to do with us? A lot.
The food chain is broken. That triangle
on slide 5 is a simplistic representation
of the juniors being the plankton
down the bottom, feeding the mid-
tiers, feeding the majors. But there
is virtually no mid-tier left anymore,
and the juniors who depend on equity
funding are dropping off one by one.
The majors would normally come along
and take advantage of that, but in these
unprecedented times, the majors have
plenty of problems of their own.
I deliberately put a picture of a shark
on slide 5 because there are a number of
analogies with that and the sort of deals
majors tend to offer to cash-strapped
juniors -- they tend to come out of the
blue, generally with a smile on their
face, but then they dismember you and
spit you out. The chart on slide 5 shows
the level of exploration expenditure and
the number of discoveries. They are both
dropping off. You could argue that there
are fewer discoveries because there
is less expenditure, or vice versa. But
either way, it is a major paradigm shift.
What does it have to do with S2?
Everything. If we weren't fortunate
enough to have that money in the
bank as part of the deal, we would
be in a pretty tricky spot, like a lot of
other unfortunate juniors on the list of
zombies, which is growing as we speak.
There is no real chance of raising
money on sensible terms for the
foreseeable future for most people.
For an explorer like us, cash is king.
We need it to survive. We need it to
continue our business, and we need it
basically to avoid having to go to market
to raise funds for as long as possible.
We need as much as possible of
that cash in the bank to be ready to go
when the ag is dropped, and we need
to trawl around for the opportunities
that are just starting to proliferate.
Last, but certainly not least, we need
to protect our capital structure for our
shareholders. We don't want to run out
of money and then have to go to market
to raise extra cash on bad terms and
dilute our loyal shareholders, so we
What has this got to do with us all?
The big guys have the capacity but have bigger hurdles, no
long term investment in people, and no appetite for risk
The guys in the middle have all but ceased to exist
The little guys now have most of the brain power, flexibility,
lower thresholds, and importantly the imperative (survival)
but are starved of cash
The big nasty guys ultimately rely on the plankton but the
food chain is broken
The consequence of this?
Fewer discoveries due to less expenditure?
Or less expenditure due to fewer discoveries?
Symptoms of an ecosystem in decline
But as with any Darwinistic process, this will
create new evolutionary niches for those that
can survive and adapt
The signs are here...an exponentially growing casualty list
Dividend suspensions (Anglo, Glencore, Freeport -- so far), and massive write
downs (BHP ($7b) and Freeport ($4.5b))
55 mining companies under credit rating review
Sale of First Quantum's nickel business, all of Nyrstar's mining assets
Suspension/deferral of BC Iron's Nullagine iron mine, Cons Mins' Woodie
Woodie manganese mine, Grange's Savage River iron mine, maybe Gindalbie's
Karara iron mine
Closure of Mincor's and Panoramic's nickel mines, Votorantim's refinery
Administration for QNI, OM Holdings, Shaw River Manganese, and survival
creditor deals by Atlas
Production cuts of 400kt of copper and 500kt of zinc by Glencore
China growth slump, less demand for iron, nickel, manganese, copper, extreme
volatility & government intervention on Shanghai Stock Exchange
Unprecedented volatility in (and gaming of) bluechip equities
Peak oil now Cheap oil, Iran in from the cold, oil shale yesterday's thing, BP's
quarterly profit dropped by 91%
Juniors morphing (again) to tech co's, and lithium running hot (increased
demand to treat depression???)
"this is not a normal cyclical downturn, but a fundamental shift that will
place an unprecedented level of stress on mining companies" (Moodys)
VOLUME 10 NUMBER 2 • Australian Resources and Investment • 57
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