Published in the July 2007 Australia’s Mining Monthly

While good miners are usually good at finding economic deposits and turning them into valuable mines, most would admit that the world of high finance with its hedging contracts, derivatives, put and call options and the like is a mystery to them.

Being able to choose the best financial instruments can make a massive positive difference to a miner’s bottom line.

This knowledge gap led to the genesis of independent corporate treasury provider Oakvale Capital, which has built a sizeable clientele in the industry. Its client list reads like a who’s who of the established and emerging miners, including LionOre, Centennial Coal, Kagara Zinc, Anvil Mining, Midwest Corporation, Fox Resources, Mount Gibson Iron, Portman and Minara Resources.

Other clients include airline Virgin Blue, health fund HBF, printer maker Fuji Xerox, Dymocks Booksellers and the Australian Red Cross.

One of Oakvale’s key services is creating a treasury policy that helps companies identify and quantify their financial risks and then manage them. If required, it works with management to present that policy to the board and help get it approved.

Oakvale can also help set up treasury committees and provide them with market information such as daily reports and monthly economic updates, and assess the suitability of any financial instruments and products offered.

Oakvale uses Quantum – a treasury software system from SunGard used by companies such as BHP Billiton, Foster’s and Qantas – to measure company performance against budget rates and revaluate them using independent market rates. It has a dealing room with 10 people and the Reuters and Bloomberg screens commonly used by treasury operations.

Oakvale associate director commodities Todd Ross said the firm dealt for its clients if required. “Out of the mining clients we have we probably deal for about 75-80% on their behalf,” he said. “There are some that like to retain that control and some like to have that contact with their banks. But for the others it’s an area of expertise they don’t have. We’re an independent source that can deal on their behalf.”

Ross said Oakvale dealt for a client based on its board’s philosophy. “It depends on what they are trying to achieve,” he said. “For some it may be cashflow driven so we might want to be a bit more aggressive and look at more hedging. It also has to be put into the context of what the banks want and the constraints of the business. We pore through the fine detail of what the banks are offering.”

Oakvale has a fair bit of buying power – about $3.5 billion worth – to help get its clients better deals. “A big part of what we do is managing cash portfolios for the clients,” Ross said. “That’s managed on a board mandated policy we put together for the clients. Managing about $3.5 billion gives us the ability to negotiate better rates for our clients than they could themselves.”

The dealing does not have to involve complex financial instruments. “A big part of what we do is to manage cash flows for our clients and we look at what’s at risk,” Ross said. “Sometime we can simply put in place a natural hedge, such as using US dollar receipts to pay for US dollar costs.”

Its independence is important to Oakvale’s clients. Independent advice can be particularly important to companies in their early days when they are first borrowing money to get a mining project off the ground. Most financiers will usually demand that the company in question hedge some of its production.

Ross said that once a company had entered into a hedge arrangement there was often little that could be done about it so it paid to get it right from the start. “Banks will have some form of agenda in terms of the type of products they are trying to push,” he said.

Fox Resources managing director Don Harper said that independence had prompted him to seek Oakvale’s advice. “We had borrowed some money from Societe Generale and they wanted us to hedge. We wanted someone to independently check that we weren’t getting shafted,” Harper said.

With the hedging sorted out, Harper said, attention had turned to treasury policy.

Ross said Oakvale helped devise an appropriate policy and would help management articulate that policy to the company’s board. “In mining there are a lot of boards that have very technically driven people,” he said. “But they are very light on for finance experience. This stuff is totally new territory for the directors we speak to. We can educate the board to understand the pros and cons of all the scenarios.”

While Oakvale is keen to build its mining clientele it is particular about who it will deal with. The company once turned down Sons of Gwalia because it was not happy with that company’s hedging arrangements. It also provided treasury services to two other struggling miners, Croesus and Gleneagle Gold.

In Gleneagle’s case the administration seems to have come about because of production difficulties at its Fortnum project.

With Croesus, while its difficulties revolved around hedging, the core problem was that the production figures supplied to the board were much higher than what was delivered. “The Croesus hedge program was simple and well managed. But essentially, the greatest risk still comes from where production targets aren’t met,” Ross said.

The increased focus on corporate governance requirements post-Enron, HIH and Ansett has helped Oakvale grow its business. Company directors are much more mindful of their responsibilities and want the best possible advice to ensure they meet them.

Oakvale has had to add two accountants to its payroll, largely because of the introduction last year of Australian accounting standard AASB139. That standard led to Western Australian gold producers Croesus and Resolute Mining booking $18 million and $49 million losses respectively last year.

“A big part of the decision now is how you can account for that risk,” Ross explained. “You have to prove the hedge you put in place is an effective hedge.”

KPMG energy and natural resources partner Alison Kitchen said to be effective the “transaction has to be almost perfectly matched and has to have a very high likelihood – 95% at inception and 80% going forward – of occurring”

With the accounting capabilities in place, Ross said Oakvale was capable of putting together hedge transactions that would meet the requirements of the standard and not have the profit-and-loss volatility that some companies had experienced.