Last week’s merger announcement from Blackthorn Resources and Intrepid Mines was an interesting example of the powerful forces at work, which include a shortage of investor interest in small miners, low commodity prices and a legacy of heavy losses.
Both companies have been hit hard by the downturn that followed the boom and both have been looking for a way to rebuild.
Their solution is a marriage of equals designed to create a single business with shared costs, a focused interest in a promising copper discovery and a chance to create shareholder wealth.
Other companies will choose different routes to rebuilding, or in some cases have that route chosen for them as stock exchange regulators trawl through the list of stocks unable to pay listing fees or because they’re showing other signs of imminent insolvency.
In every instance, including the BHP Billiton plan to slim down by spinning off assets surplus to requirements, the driving force is the same – a new set of financial conditions, which include changing demands from customers, slower growth and much closer attention to costs.
Gone are the days of easy uplift from rising commodity prices and an abundant flow of investor capital.
Welcome to the new normal of frugality.
The BHP Billiton demerger plan is all about shifting a giant business into a place where it feels more comfortable and where its size can play a role in dictating the price of what it produces.
Essentially, that means going down a road called “big and bulky”, shifting most of the base metal assets (other than copper) into a separate business and showing no interest whatsoever in precious metals.
For investors it will be interesting to watch whether this latest attempt to streamline a mining monster works, given that all previous efforts have failed.
However, without a fresh approach it is likely BHP Billiton would remain a business rooted in its past, forced to invest in poor-performing mines that held back the overall group and which might do better under a different and more focused management team.
The Blackthorn/Intrepid marriage is another way of handling a similar set of problems, with both companies badly bruised by the downturn and now in danger of drifting into a sort of twilight zone of minimal investor interest and limited opportunity to grow because of a lack of access to capital.
Further down the pecking order there are several hundred small mining companies, perhaps as many as 500, which are also considering their options for the future before the future crushes them.
The numbers – as Dryblower has demonstrated in the past – are alarming, with the ultra-small miners (as measured by stock market capitalisation) trapped in a sort of corporate black hole from which not even light can escape.
At the last glance there were 796 companies with an Australian Securities Exchange listing valued at less than $10 million, many of the small explorers eking out a hand-to-mouth existence in the hope that something might happen, or someone might buy their corporate shell and turn it into a technology revival story.
No one in the mining industry needs a refresher course in just how tough conditions have become but it is important to consider what has happened in order to see the next phase of the process which will not be easy but it will lay the groundwork for better times.
BHP Billiton, minus its baggage, might indeed be able to do what management claims and achieve more profitable growth in a slimmer format.
Blackthorn/Intrepid might also be able to achieve what its reshaped management team wants and that’s a combined business with lower costs and a potentially viable copper mine at Kitumba in Zambia – and a soon-to-be forgotten history of bitter disappointments and failed plans.
In a way, the BHP Billiton spin-off and the Blackthorn/Intrepid merger could achieve precisely the same result, albeit in a slightly different way.
Out of BHP Billiton will come a new mining business with an assortment of assets that should be profitable and able to expanded – an example of two viable companies emerging from one.
With Blackthorn/Intrepid it is a case of two companies that are struggling to grow morphing into one viable business.
The common theme is viability and that is what other small companies need to achieve, a viable business plan that does not require a steady drip-feed of investor capital but is able to stand on its own through profitable mineral production.