MIM - AFR article

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    Making old coal do new tricks
    Jul 15
    Stephen Wisenthal

    Vince Gauci has almost completed the repair job at MIM Holdings, but he says not one operation has yet reached its full potential. Photo: ROBERT ROUGH
    The management team that moved in more than six years ago to sort out MIM Holdings threw assets overboard like balloonists scrambling to remain airborne. The oil and gas division, Papua New Guinea gold mines, a German copper refinery, stakes in Canadian and American miners, and countless other assets acquired in an ill-fated drive for diversification were sold to raise money to fix what was left.

    With the repair job almost complete, managing director Vince Gauci sees a bright future of strong growth from the remaining coal, copper and zinc assets.

    Ironically, most of the projects that will provide this growth were there all along - MIM has owned them for decades.

    Just five years ago, many analysts expected that MIM's two coal operations - Oaky Creek and Newlands-Collinsville and the linked loading facility at Abbot Point in Queensland - would join all the other assets on the auction block.

    Instead, the division has been turned around, rebounding from losses five years ago to expected earnings before interest and tax of more than $400 million in the year just ended.

    Gauci, a leading member of the MIM clean-up crew since he joined the company in 1995, played a key role in the coal turnaround.

    The mining engineer who spent 28 years with CRA (now Rio Tinto) was appointed to MIM's board in 1999, and took the top job in April last year.



    Both key growth initiatives launched on his watch have been in coal. One, the $321 million purchase of 55 per cent of the Moura coking coal mine, announced earlier this year, was derailed when minority owner Mitsui pre-empted the deal and chose Anglocoal as its partner.

    Now MIM is on the verge of deciding whether to proceed with the first of two large new coal mines - both of which will tap deposits held by the company for more than 30 years.

    If the feasibility study for the Rolleston project is positive, trial mining will start by the end of this quarter to produce 200,000 tonnes of steaming coal for sampling by utilities around the world.

    "Seaborne traded thermal coal is growing at about five per cent per annum, so there is potential for additional supplies," Gauci says. "That's the area that we just happen to have the reserves, and we see a real opportunity. They are close to the surface, close to the coast, so we expect them to be very low-cost, high-producing mines."

    In the Bowen Basin, the site of MIM's two existing coal operations, Rolleston will produce about 6million tonnes a year. Wandoan, at present in pre-feasibility studies, would be even larger at about 10 million tonnes. Both would export through Gladstone, a port MIM does not now use.

    In the early days of the management team, when assets were being unloaded in a rush, a large portion of Wandoan, which Gauci calls "the biggest and best resource" in Queensland's almost untapped Surat Basin coal fields, was almost lost to US utility Entergy, which planned to mine the coal as part of a power project.

    "We could have lost the asset, that's quite true," he says. "The company [Entergy] had an option on the property, and that option lapsed, so the field was returned to us. Because we'd been putting all of our effort into improving what we had, we hadn't given sufficient thought as to the quality of the assets that we had outside our operating mines."

    Gauci is particularly sensitive to suggestions that there is no future in MIM's core Mount Isa copper and lead-zinc mines, around which the company was founded in 1924.

    MIM has spent more than $1billion over the past five years on developing new copper and lead-zinc ore bodies and expanding and upgrading its copper smelter and refinery, as well as lead processing plants.

    "The view was, and maybe is in some cases still, that Mount Isa is a tired old girl. She's just about had her day, and it's high cost and it's a short-life operation, industrially complex, a mining town with its particular problems in managing a city around the smelters," he says.

    "The facts of the matter are that all of the infrastructure has been refurbished and we're mining two new mines."

    MIM now has a program of drilling to ensure there are always 10 years of proven reserves remaining at the mines, as existing reserves are depleted.

    The improvements will be obscured in the profits MIM announces next month, thanks to a run of record-low metal prices during the year. Credit Suisse First Boston is predicting about $94.8million for the year ended June 30, before one-time gains from the devaluation of the Argentine peso, while Deutsche Bank forecasts $86 million.

    Both brokers rate the stock a "buy" and predict a profit surge in the current year. Deutsche forecasts $165 million, while CSFB is predicting $227.1 million, including the benefit of a recently agreed 12.5per cent increase in benchmark coking coal prices.

    MIM shares closed at $1.36 on Friday, compared with most brokers' valuations and target prices of $1.60 or more.

    "What makes the company attractive is its leverage to hard coking coal and copper prices," says ING Investment Management resources portfolio manager Vik Pitrans. "Vince will unshackle the chains [if he releases] a couple of hard numbers in the reporting season. He's a very good operations guy. Time will tell how he runs the company."

    Gauci, speaking in his Spartan office at MIM's headquarters on the fringe of Brisbane's central business district, says that behind the turnaround at the coal, copper and zinc mines lies "a pretty basic philosophy" of picking competent operational managers.

    "We've worked really hard in the last six years to ensure that we've appointed people into our management teams that can earn the respect of the workforce," Gauci says.

    "We have never come across a bad workforce yet. It's really the responsibility of management to earn the respect of the people who do the work." The bitter labour disputes are now past, he says.

    "We have, I think by and large, a very good working relationship with the unions. We respect their role and I think they respect our role. We've had no industrial activity to speak of in the last four or five years. We don't anticipate any industrial concerns. We just keep concentrating on the fact that we have to earn that position."

    Amid all this optimism, MIM is being weighed down by a hedge book put in place several years ago.

    For example, first-half earnings before interest and tax of $121.3million would have been more than $150 million higher if the company had not been obliged to switch the majority of its US dollar sales into Australian dollars at more than US60¢.

    "We've taken the view that we're going to close out our hedging contracts," Gauci says. "The company hasn't got the investment ahead of it that it had. Our debt is on the way down. Our operating costs are much lower, our margins are better, we don't need the protection of major hedging."

    With the market convinced that, metal prices willing, MIM's profits will surge this year, and with new projects almost underway, Gauci, born to a Broken Hill mining family, is still not satisfied.

    "We've got a lot of work to do yet in continuing to improve," he says. "Not one of our operations has achieved its full potential yet."
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