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Mining
With the RBA sending base interest rates to an 11 year high today, Westgold Resources (ASX:WGX) boss Wayne Bramwell says rising finance costs are ratcheting up the risk for juniors looking to develop new mining projects.
A liquidity crunch hitting the small end of the resources sector has been floated as rationale for its bid to swallow nearby explorer Musgrave Minerals (ASX:MGV).
Musgrave owns one of the most exciting greenfields gold deposits on the ASX, the 327,000oz Break of Day project near Cue which boasts a grade of 10.4g/t. Part of a larger resource base in WA’s Mid West, MGV boasts almost 1Moz across its Cue gold project, most of it at much lower grades.
But it would cost around $121 million to bring to life, at a time when juniors are seeing equity and debt capital dry up.
According to figures from BDO, investing in flows to ASX-listed exploration companies fell 53% to $1.71 million per company in the March quarter, less than half the two year average.
Westgold will offer up 1 share for every 5.37 held by MGV shareholders in a bid valuing the junior at 30c per share or a touch over $177 million on Friday valuations.
Bramwell’s pitch is that the combined Westgold, which will give
a 18.9% stake in the group to MGV holders, already a 250,000ozpa miner, will be able to weather tougher financial conditions and use its existing infrastructure to develop the deposits in just six to nine months.
“The game now is very much becoming about scale,” he told Stockhead.
“The explorers have had the benefit of pretty supportive equity markets for a couple of years now. And a lot of that hot money has started to sort of drift away for macroeconomic reasons.
“There’s certainly since Christmas time, been an appreciation of gold producer stocks as people are starting to understand that if you’re an explorer or project developer, those things are really hard places to be.
“You see it everyday, stories about people in construction at the moment, with massive capital cost blowouts, or schedule blowouts and that’s a reality for people trying to transform explorers into producers.”
The swift rise in interest rates over the past year, climbing a further 25bps to 4.1% today, will make financing harder, Bramwell said.
“The cost of securing equity or debt for projects in the last 12 months in Australia has changed considerably and will continue to do so,” he said.
“A lot of that’s driven by the macro. A lot of it’s also driven by recent projects’ startup history now, which is probably making — certainly the debt providers — take a little due diligence over how and/or who they lend to.”
In the aforementioned capital letters common to M&A parlance, the Musgrave board has told investors to hold tight, with Westgold’s bidder’s statement just around the corner.
WGX, which owns three processing plants and four historic underground mines in WA’s Murchison gold fields, including the Tuckabianna and Bluebird mills 40km and 120km respectively from MGV’s tenements, had put a proposal to the Musgrave board last week.
The $680m gold miner claims the talks must have leaked, after witnessing a 6.25% rise in MGV’s share price yesterday on no news and high trading volumes.
Bramwell says the goldie remains keen to come to a friendly arrangement with Musgrave’s board even after deciding to put its offer directly to shareholders.
Logic suggests there could be challenges from another nearby mid-tier gold miner in Ramelius Resources (ASX:RMS), while the larger Evolution Mining (ASX:EVN) is on MGV’s register with an almost 4% stake.
MGV’s share rose 17.65% today to match Westgold’s 30c offer price, potentially in the hope from investors of a higher bid. But WGX shares fell 10%.
Despite the tepid reaction from its own shareholders, Bramwell says the MGV tie-up has a strong foundation.
WGX says with the MGV ounces it will have 8.8Moz in resources and be able to ramp up production to 290,000-300,000ozpa at potentially lower all in sustaining costs from the incorporation of MGV’s shallow, high grade deposits.
“It could be the market but again, ultimately, higher grade resources being substituted for low grade resources is something which I think once they understand what it can do for the business, they’ll be very supportive of,” he said.
The materials sector started off the day in fine form as higher iron ore prices, edging back towards US$110/t on reports stronger support for property buyers was on the cards in China, saw BHP (ASX:BHP), Rio Tinto (ASX:RIO) and Fortescue (ASX:FMG) head into the green.
In the end only FMG stayed there along with a couple of the big lithium names as the shift in mood following the RBA’s decision to lift rates to their highest level in 11 years sent the market tumbling in the afternoon.
Blue chips were spat out like rank oily Hungry Jacks fries
Coal stocks were among the few areas of the market standing out from the pack.
Higher natural gas prices provided support to thermal coal’s traditional arbitrage in power generation against LNG, with front month futures lifting almost $10/t to US$143.75/t.
Whitehaven (ASX:WHC) shares lifted more than 4%, while Yancoal (ASX:YAL) was up 3.6%.
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