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    Global miners chase Aussie gold
    June 24 2002
    Sydney Morning Herald

    Foreign control of Australia's gold sector is nearing 60 per cent - and rising, writes Jane Counsel.

    Highway Robbery and the Great Gold Swindle are just some of the colourful terms being used to describe the sell-off of Australia's $5.5 billion gold industry.

    In a little over a year, foreign control of Australia's gold sector has jumped from 30 per cent to 60 per cent - and is yet to show any sign of stopping.

    Canadian miner Placer Dome's $2 billion bid for AurionGold, if successful, will push foreign control of the sector out to 70 per cent, according to industry statistics group Surbiton Associates.

    And despite the community uproar that Royal Dutch/Shell Group's hostile bid for Woodside Petroleum sparked a year back, the great gold robbery has happened with hardly a murmur of protest.

    The gold industry may generate more than $5.5 billion in exports annually but the Treasurer, Peter Costello, has made it clear that the same national interest argument doesn't apply to the sector. His decision to prevent Shell from acquiring Woodside was about protecting a major gas resource at the North-West Shelf off Western Australia.

    And although there may be some job losses and an increasing amount of profits spent offshore, Costello and many other market observers don't appear to see any problems with the gold industry falling into foreign hands.

    "I don't think it's the same issue. It's not like the North-West Shelf where you had the risk of major infrastructure not being duplicated," said Darko Kuzmanovic, vice-president of equities at Deutsche Asset Management.

    The argument is that foreigners are buying our gold companies because they want to diversify their global assets and hence it's in their best interests to see new deposits and mines developed in Australia. But others disagree. They argue that it's this very complacency from both government and the investment community which is allowing the industry to be sold off so cheaply.

    The gold industry's ever declining size as a percentage of the overall equities market, along with its failure to consistently deliver strong returns on shareholder funds, has not endeared the sector to the big institutional investors.

    And whatever interest they may have had in gold equities was all but killed off during the dot com boom of 1998-2000, where the type of returns delivered by overinflated share prices better suited the investment market's short-term focus.

    "Everybody hates resources from an investment sense because they've all been burnt," said Warren Staude, joint principal of resource-focused Action Management Fund. "[But] that's the problem because they can't look far enough ahead."

    The recent rise in the gold price to a near six-year high of $US326 an ounce has reignited some support - but the cynics argue it's too little, too late.

    An overriding need for global consolidation has been a key driver of the takeover activity in Australia. But ironically, as Surbiton Associates' Sandra Close points out, "the benefits flowing from rising prices and increased profits will not flow to Australian investors".

    The long-term lack of investor support in the sector has seen the share prices of major gold producers wallow which, when combined with the weak dollar, has made them cheap targets for foreigners - particularly for the North American miners, whose share prices trade at a hefty premium over their Australian peers.

    In many cases, foreigners have been able to offer their scrip at significant premiums, without having to add a single cent of cash to win over Australian shareholders.

    And while foreign miners have long seen the potential, it's only recently that the local investment market has come to recognise the strategic value of Australian gold assets. That value really came to light during the hostile battle for Australia's largest miner, Normandy Mining, earlier this year.

    Most analysts were stunned by the $4 billion which Newmont Mining ended up paying for Normandy after trumping several earlier offers from AngloAmerican.

    That's because Normandy had failed to attract a valuation of even half that amount from the local investment community before the bidding duel.

    Although the premiums being paid for our major goldminers may be good news for long-suffering shareholders, it's the spending of future exploration dollars in Australia where the critics argue that higher foreign control will be most noticeable. Due to low levels of investment, exploration spending has been in sharp decline in recent years.

    Although the trend has turned in recent months due to the gold price surge, in the past five years exploration spending has dropped by 50 per cent to $350 million.

    And for global companies such as Newmont and Placer, future exploration spending in Australia will have to compete for funds with the rest of their worldwide portfolio. This means that those companies may only focus on known targets around existing mines or allocate spending in a country like Australia, depending on where it sits on the list of their international priorities.

    "A large company is only going to explore where it thinks it's going to get the best bang for its exploration dollar," Mr Staude said.

    Exploration aside, the gold industry is also a big spender on infrastructure and development and, according to the most recent numbers, spent around $4.59 billion in Australia in 2001.

    But on the other side of the ledger, others would argue that foreign interests such as Newmont and AngloGold are pouring a lot of money into the Tanami Desert, Australia's latest exploration hotspot.

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