The 5 Most Destructive Deals in Mining History

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Right now, Buddy Waters, we've
got an M and a special and well

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taking I'll probably pick the
wrong one here 'cause it's an

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M&A howlers special.
But possibly the greatest M&A of

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all time was done by Sambic for
the ground support division.

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So it's like the opposite of
what the show is about.

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But acquiring DSI is M and I
spectacular because getting DSI

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the Grand sport division in
means they pretty much got Derek

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Heard for free.
Derek came for free and they

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made that's vertical
integration.

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I mean, you were, you were a
jumbo operator in Sambic

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Machines and now guess what?
Sam jamming in Sambic Bolts.

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Brought to you by Derek Heard
and the team at Sambic Ground

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Support.
Derek.

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Derek alone was worth the €1
billion they paid.

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I don't think I'll be doubt
about it.

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Sorry, maybe I said it wrong.
They got the ground support

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division for free.
They paid a shit load for Derek

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Gerd.
Yes, go see money well spent.

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Go see a big ground sport.
Let's get into the M and a

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Howlers episode.
Right on money miners.

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We've got a JD Spectacular M and
A disasters, it's titled.

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Yeah.
Most or M&A mishaps, should we

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be a bit more positive, no
disasters?

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I think there's a silver lining
in in most things, Maddie, I did

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come at it wanting to to learn
about that disasters,

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specifically the Riversdale one.
But yeah, for for the money

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miners, we're going to talk
about five of the most valued

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destructive deals in in our
industry and hopefully learn a

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thing or two along the way about
the the history.

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What about what you can do
better as an investor, about

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what mining companies can do
better along the way.

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So it's a bit of a walk through
mining history.

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Best way to learn bad capital
allocation is pull out these

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these case studies and say I'm
not going to do that.

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Yeah, same can be said for for
stuff on the good side as well,

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which we'll get to in due
course.

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But there's, yeah, there's a one
or two things to say the least.

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It can be learnt from some of
these mishaps as you said.

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Yeah, So what, what what went
towards the shortlist?

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JD how did you determine what
was value destructive and what

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wasn't?
It was a bit sort of scattergun

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at first, so I decided to to
make a bit of a criteria for it

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and then go from there because
there's loads of different

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things that have happened over a
very long bit of time.

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So how I kind of went about it
was deals that have happened in

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the last 30 years and you know,
not very recent ones either

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because they really haven't had
the the appropriate amount of

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time to run their course.
You need a bit of a cycle or

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two.
And going beyond 30 years gets

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kind of hard on the on the
research side of things, Hard

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Rock commodities.
So the likes of BHB and Freeport

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venturing out into the oil and
gas world can be thankful.

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Going to keep to what we know.
The Hard Rock mining side of

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things.
Also, this is a kind of big one.

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They had to be an Aussie company
doing the buying, so not focused

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on other deals.
Maybe there's another episode in

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that in due course because
there's some very interesting

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deals that international
businesses have done, but this

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is an Aussie company doing the
buying.

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Aussie based or Aussie listed or
both listed?

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Yeah, Yeah.
Another big one is focusing on

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on out and out errors rather
than kind of errors of omission.

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So not talking about kind of
selling an asset at the at the

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worst possible time, you know,
at the bottom of a cycle there.

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They're big mistakes as well and
and you learn from them.

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But we're talking about deals
that were actually done and that

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resulted in big kind of
financial downside rather than

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foregone earnings kind of.
The flip The flip side of this

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is the sellers of all of these
deals had a great deal.

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They generally did, yeah.
The silver lining to everything,

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right and the last couple bits
and pieces is that they're not

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bad projects.
You know, this is this is deals.

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We're not talking about projects
that a company had and sunk

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money to that didn't quite go so
well.

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And yeah, I guess a feature you
sort of pick up along the way

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that you know, the the cash and
kind of script component, it all

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can often end up being a worse
deal depending on the structure

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of of that deal.
So that played a bit into the

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actual ranking of of the five.
Very good right out take it

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away.
Is these in order of at least

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shittest to my shittest?
I'll talk through the the

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ranking real quick because it is
super hard and pretty subjective

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to be honest.
I'm sure anyone could change the

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order as they kind of see
appropriate as well as change

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out the five as a little bit to
choose from.

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And it and it's kind of hard.
You know, things kind of change

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over time as, as you sort of
pick up in the deals and how

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badly they were rated, you know,
that can change.

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Say there's a commodity uptick
and maybe it's not quite as bad

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because you get a bit of
compensation down the track.

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But just to to speak to my
thinking, I'm thinking of a

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combination of how much money
was sunk in, particularly as a

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proportion of like your business
side, if you being the buyer are

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going towards it.
You know, was it a 5% of your

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market cap or we're talking
about 35% of your market cap?

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What kind of state that left you
in as well factored pretty

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heavily in in my thinking, if
you're able to ride it out kind

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of fine because the commodity
cycle continued to power on and

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took you through and maybe it
wasn't so bad.

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But if that was funded by a debt
and left you in a pretty

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perilous state and in, you know,
very, very bad shape in some of

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the cases, then that doesn't go
well toward the toward the the

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ranking.
So, yeah, all of that size, deal

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size, what time in the cycle
company's ability to recover?

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What happened to the management
team and the executives

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afterwards?
You know, did they sort of go on

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the the chopping block?
I did kind of think about the

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the rationale from executives,
how they thought about the deal,

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how outrageously confident some
of them were.

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Were there perfect?
Time incentives that motivated

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it.
Yep, that definitely.

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That definitely factored in.
So oh.

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Mate, I'm hanging on to me.
So JD come on.

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Group in mate all.
Right, let's start #5 Maddie

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Ucrest buys Lahir gold, So a big
gold deal.

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We're going back to 2010 for
this one gold.

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I'll set the same tearing higher
coming out of the GFC.

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So to dip down 2008 nine, it was
around US 700 ish in that kind

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of range in late 2008.
And by the time they're starting

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to talk about this deal and it's
getting announced in April of

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2010, gold is approaching US
1200 bucks, so.

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Right when Northern Star bought
their first gold asset, nearly.

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Yeah, there was this sort of
2010 to 2013 period was huge in

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shaping the landscape of the
gold industry.

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So New Crest is the buyer here.
They are the big Aussie gold

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champion, as everyone kind of
knows, kept at about 15 billion

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bucks at the time, in a time
where one Aussie dollar was

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buying you about 92 ish US
cents.

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So they've had, you know,
Telfer, Acadia, Krakow, Hidden

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Valley and Gosselong as their
operating assets at that point

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in time doing a bit over 1.6
million ounces.

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And that was the high day like
that was like the Telfer sub

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level cave when it was pumping.
Stock is at an all time high

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when they're going into this
deal and then you've got Lahia

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gold so they again an Aussie
listed one in in this case

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they're getting towards a
7:00-ish billion dollar Aussie

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market cap pre the bid.
Wow.

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They expanded the gold resource
at Lahia by 30 odd percent in 20

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and 2009, so the year before the
deal to a resource of 43,000,000

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oz.
So looking very, very pretty for

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a prospective buyer there.
And here was their crown jewel.

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It was about 75% of their
earnings.

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They also operated Mount Rawdon
and Bonnet Crowe, so 1.2 million

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oz.
Not actually crazy amounts

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smaller.
It's just the sort of

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jurisdiction and the nature of
those answers and the

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profitability that leads to the
desperate market caps between

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the two companies.
One other thing to bear in mind

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in the context here is resource
rent tax, a big deal.

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We had Gina Twiggy Hyvee's
marching down the terrace.

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This was huge in this time and
it led to a lot of the operators

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looking overseas as opposed to
in Australia because they were

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scared of what a potential
taxation environment might do to

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an asset here.
Gotcha, Gotcha.

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It's a short term.
You're thinking I've got to

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diversify my earnings overseas.
Yeah, the economics just look

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comparatively a bit better.
So the deal itself, April Fool's

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Day actually in 2010 LGL, that's
Lahia, rejected a scheme of

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arrangement from Newcrest.
And funnily enough, this was the

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same day that Lahia had a new
CEO take charge.

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So this CEO did quite well for
himself. 4,000,000 bucks he

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earned in a four month stint at
the business.

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Newcrest were $10.
Yeah, Yeah.

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Back when it meant something new
crests were offering one share

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for every 9 LGL shares, plus a
cash kicker in there.

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So they valued here at 9
billion, which was a a bit over

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a 30% premium, you kind of
standard premium.

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But it was revealed in the docs
that they'd actually had a swing

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a couple months before and this
was a 12% increase on their

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previous bid.
So a more than a billion dollars

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to the price tag.
Who?

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Who revealed it?
JD.

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It came out in in the docs that
I think had a a new Crest.

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Yeah, tag on.
But the very first public

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announcement, did it come from
New Crest or did it come out of

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YEAH?
It came at it.

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It came out of Lahia saying they
had rejected the proposal.

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Yeah.
And then, you know, both of them

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come out with an announcement on
on the same day and subsequent

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as well.
Regardless, Lahia wanted a price

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bump and ultimately they would
get it.

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So you've got this sort of
classic period in in takeover

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games where Newcrest just
stresses their cost discipline,

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how they're, you know, going to
be very disciplined in their

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approach to how they pay for the
year.

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And LGI was just telling the
world why the bid undervalues

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them.
So in the background, gold

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continues to to tear higher
actually, and it actually

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finishes that year at close to
1400 bucks an ounce.

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So a pretty mighty movement in
the space of about two years on

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the gold front.
Give it a month or so and the

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deal reaches its kind of
conclusion.

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New Crest, improve it again.
They value LGL at about $9.5

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billion.
Cash makes up about 500 of that.

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And a few months later the deal
closes.

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So they accept.
It.

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Did and the the marriage code
ends up being about 36% LGL and

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the remainder were the UCREST
shareholders who gobble them up

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in this merged entity and they
go to a net debt position of

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about Aussie 300 which ends up
blowing out because CapEx needs

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to be spent which I'll get to,
but this creates the fourth

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biggest gold producer in the
world.

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Wow, that is phenomenal.
Just saying that, that

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percentage pro form of just
considering the assets that is

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unbelievable.
It is right.

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So interesting.
So thinking about how Newcrest

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management pitched this deal to
its own shareholders was kind of

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interesting to to read into.
They're saying we're buying a

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heap of answers and we're buying
them cheaply because they're in

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PNG of course.
And they're also saying that

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these answers are going to be
low cost to produce, which is

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something that doesn't
ultimately end up really being

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true.
They're talking about

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geographical diversification as
well.

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And all up it's pretty light on
synergies.

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There's not awful aside from the
corporate side of synergies

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taking place in, in this deal.
They do stress that they're

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experience in Indonesia will
help them handle the the

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complexity of here and operating
in in that part.

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But they lay out this beautiful
growth picture.

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They're going to 3.75 million
ounces in five years time.

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And you know, sadly they're not
only end up getting to a bit of

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a 60%.
If you look at the FY20 14

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numbers and how it actually
compares at that point in time

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00:11:59,600 --> 00:12:01,440
that they didn't get anywhere
near it.

226
00:12:01,440 --> 00:12:06,480
They just wanted a a much bigger
production profile and this was

227
00:12:06,560 --> 00:12:09,480
this was a roaring gold gold
bull market.

228
00:12:09,480 --> 00:12:11,920
Like we have to really let that
sink in.

229
00:12:11,920 --> 00:12:15,480
Things were going gangbusters.
These guys all of all the the

230
00:12:15,480 --> 00:12:17,640
gold industry is hitting all
time highs.

231
00:12:18,360 --> 00:12:21,880
Gold is high for longer.
You know, people are pumped up

232
00:12:22,400 --> 00:12:25,440
and management is sort of
rationalizing this deal because

233
00:12:25,960 --> 00:12:29,200
in their words, it positions new
Crest to fully participate in

234
00:12:29,200 --> 00:12:31,000
the current strong gold price
environment.

235
00:12:31,360 --> 00:12:33,840
And would that have been the
same time when poor girl was

236
00:12:33,840 --> 00:12:36,880
probably pumping for Barrick in
PNG?

237
00:12:36,880 --> 00:12:39,560
So PNG would have.
I believe so you.

238
00:12:39,560 --> 00:12:42,720
Know appeared to be a friendly
jurisdiction.

239
00:12:43,160 --> 00:12:46,080
Yeah.
So 2010 to 2015 was an

240
00:12:46,080 --> 00:12:51,360
interesting time for PNG.
There were, once it comes into

241
00:12:51,360 --> 00:12:53,320
Newcrest ownership, a fair few
disruptions.

242
00:12:53,320 --> 00:12:57,880
Protests didn't tend to hold up
the mind for too long, but it

243
00:12:57,880 --> 00:13:00,640
did seem the years later we're a
bit more disruptive.

244
00:13:00,840 --> 00:13:06,400
This block was picky, but I
think the economic regime was a

245
00:13:06,400 --> 00:13:09,760
bit friendlier at that time, so
it has changed a bit since then.

246
00:13:10,280 --> 00:13:11,160
So what went?
Wrong.

247
00:13:12,280 --> 00:13:15,800
A combination in in this deal
made things really go pear

248
00:13:15,800 --> 00:13:17,520
shaped.
Firstly, they, they got the

249
00:13:17,520 --> 00:13:22,800
cycle wrong and that wasn't
apparent at first glance because

250
00:13:22,800 --> 00:13:27,240
they had awesomely profitable
years in 2011 as well as 2012.

251
00:13:27,240 --> 00:13:30,920
They were the most profitable
years in the company's history.

252
00:13:31,920 --> 00:13:33,880
And you know, you had that
beautiful period, kind of like

253
00:13:33,880 --> 00:13:37,120
where we're at now where the,
the gold price runs and costs

254
00:13:37,120 --> 00:13:41,200
just can't keep place with the
the run up in the commodity

255
00:13:41,200 --> 00:13:44,280
price and you actually get
outsized returns for a year or

256
00:13:44,280 --> 00:13:49,320
two before things catch up.
And 2013 saw the gold price down

257
00:13:49,640 --> 00:13:55,000
30% in that one year alone,
right as the company expanded on

258
00:13:55,000 --> 00:13:59,240
to a a massive CapEx cycle.
They wanted to hit those more oz

259
00:13:59,240 --> 00:14:02,960
that they promised.
So the excess returns from those

260
00:14:02,960 --> 00:14:05,440
two years didn't go back to to
shareholders.

261
00:14:05,960 --> 00:14:07,920
The intentions weren't kind of
bad, you know, but they were

262
00:14:07,920 --> 00:14:10,920
just they got the timing wrong.
They spent US 1.3 billion on

263
00:14:10,920 --> 00:14:14,360
CapEx at here that ended up
blowing out, ended up being more

264
00:14:14,360 --> 00:14:18,360
than that and ended up coming
much later than planned as well.

265
00:14:18,360 --> 00:14:20,920
They wanted to hit 1,000,000 oz
per annum and they just never

266
00:14:20,920 --> 00:14:26,160
reached those levels at here.
It was just all around slower

267
00:14:26,160 --> 00:14:28,040
and more costly than I'd
anticipated.

268
00:14:28,520 --> 00:14:31,800
And the operating costs, you
know, this is the expansion I've

269
00:14:31,800 --> 00:14:34,720
mentioned, but the operating
costs didn't meet the the target

270
00:14:35,080 --> 00:14:36,560
either.
Then you've got those community

271
00:14:36,560 --> 00:14:40,800
related challenges at the here
that it is touched on as well as

272
00:14:40,800 --> 00:14:45,000
this kind of interesting,
interesting bit of news from

273
00:14:45,000 --> 00:14:47,560
2014.
This wasn't a huge impact.

274
00:14:47,560 --> 00:14:49,000
It kind of got sidetracked
because I found it so

275
00:14:49,000 --> 00:14:53,000
interesting, but it was a very
well publicized selective

276
00:14:53,000 --> 00:14:56,200
disclosure fine that EUCRIS had
to pay.

277
00:14:56,560 --> 00:14:59,480
What this was was the investor
relations team telling analysts

278
00:14:59,480 --> 00:15:03,160
to chalk down your CapEx, lift
the CapEx numbers and chalk down

279
00:15:03,160 --> 00:15:05,800
the the production numbers
because we're not going to make

280
00:15:05,800 --> 00:15:06,880
them.
And they try to sort of soften

281
00:15:06,880 --> 00:15:10,320
up the market.
And they ended up being a class

282
00:15:10,320 --> 00:15:13,320
action lawsuit and nearly a $40
million fine got laid on the

283
00:15:13,320 --> 00:15:16,480
company because you can't do
that at the end of the day.

284
00:15:16,480 --> 00:15:19,160
So yeah, there's a lot of people
I know in the industry that know

285
00:15:19,160 --> 00:15:23,080
that one quite well.
It wasn't it wasn't a a good

286
00:15:23,080 --> 00:15:26,360
sort of sequence of events and
it didn't reflect well on sort

287
00:15:26,360 --> 00:15:29,360
of company itself.
The actual fine from ASIC was

288
00:15:29,640 --> 00:15:33,760
pretty poultry, but the the sort
of backfall from that was was

289
00:15:33,760 --> 00:15:36,720
pretty gnarly it.
Was a lot of the the missing

290
00:15:36,720 --> 00:15:39,440
answers?
Was it metallurgically related?

291
00:15:39,440 --> 00:15:42,520
Because it's a it's a pox
operation, isn't it?

292
00:15:42,560 --> 00:15:44,040
Yeah, Yeah, that's right.
It.

293
00:15:44,760 --> 00:15:46,920
I mean, take your pick.
There was challenges, just

294
00:15:46,960 --> 00:15:49,320
everything.
Yeah, there's challenges on a

295
00:15:49,320 --> 00:15:53,760
lot of different fronts there to
to speak to the other two assets

296
00:15:53,760 --> 00:15:57,560
because I said here was 75% of
the earnings EUCRIS sold Mount

297
00:15:57,560 --> 00:16:02,520
Rawdon and it's Krakau stake to
a group that ends up being

298
00:16:02,600 --> 00:16:07,160
evolution very interesting.
So that happened in 2011 they.

299
00:16:07,360 --> 00:16:10,000
They have to do that.
Was that like because the CapEx

300
00:16:10,000 --> 00:16:12,560
and debt that time they chose to
do it?

301
00:16:12,760 --> 00:16:16,600
They chose to wow like 2011 was
the good times and that was just

302
00:16:16,600 --> 00:16:18,040
rationalization of the
portfolio.

303
00:16:18,880 --> 00:16:22,080
They ended up having a stake
that was north of 300 million at

304
00:16:22,080 --> 00:16:24,800
the time, but they sell that
three or four years down the

305
00:16:24,800 --> 00:16:28,640
track for a bit over 200.
So yeah, it wasn't sort of

306
00:16:28,960 --> 00:16:32,160
executed so well.
And that other bonecrow asset in

307
00:16:32,160 --> 00:16:37,080
West Africa was cashed in for 80
bucks years later in in 2017.

308
00:16:38,360 --> 00:16:41,720
So what happens to to the
executives that were part of

309
00:16:42,000 --> 00:16:44,120
part of putting this deal to the
to the board?

310
00:16:44,280 --> 00:16:47,600
Well, this is an interesting one
and we'll see a repeat of this.

311
00:16:47,600 --> 00:16:51,040
The CEO left very shortly after
the deal in in 2011.

312
00:16:51,040 --> 00:16:54,320
So at the time when that CEO
left things were looking pretty

313
00:16:54,320 --> 00:16:56,440
cruisy.
Ultimately though, on an

314
00:16:56,440 --> 00:16:59,560
accounting front, the HERE
assets get impaired by 4 billion

315
00:16:59,880 --> 00:17:02,800
just three years or less than
three years after the deal in

316
00:17:02,800 --> 00:17:07,280
2013 and then by a further
almost 3 billion a year later.

317
00:17:07,520 --> 00:17:09,720
So that is a pretty hefty write
down.

318
00:17:09,839 --> 00:17:11,520
Is that that when sand out
coming?

319
00:17:12,040 --> 00:17:16,960
Oh, I assume. 20/14/15.
Oh, so he he didn't replace the

320
00:17:16,960 --> 00:17:18,359
CEO in 28?
Yeah.

321
00:17:18,839 --> 00:17:24,319
They pay 9 1/2 billion and and
within four years 7.9 billion is

322
00:17:24,319 --> 00:17:25,359
impaired.
Plus they would have spent a

323
00:17:25,359 --> 00:17:27,520
bunch on CapEx as well.
Yeah, and if you want to try and

324
00:17:27,520 --> 00:17:32,320
be be friendly to to Newcrest,
just Google write downs 2013

325
00:17:32,320 --> 00:17:35,600
gold industry and there's a top
ten list and they're all

326
00:17:36,160 --> 00:17:38,320
disastrous.
That's what happens when the

327
00:17:38,320 --> 00:17:42,040
gold price peels off massively.
The impairment is an accounting

328
00:17:42,040 --> 00:17:45,400
thing, but it doesn't reflect
well and the assets were nowhere

329
00:17:45,400 --> 00:17:48,440
near as profitable and the
opportunity cost from giving

330
00:17:48,440 --> 00:17:52,040
away 36% of your business is
just phenomenal.

331
00:17:52,040 --> 00:17:56,000
So the stock goes from about 40
bucks a share to below 8 bucks

332
00:17:56,040 --> 00:18:00,840
in two years time. 10 years
later it gets taken out at $23.

333
00:18:00,840 --> 00:18:03,960
It was about four bucks of
dividends paid in that period,

334
00:18:03,960 --> 00:18:07,440
but yeah, it it was very, very
tough.

335
00:18:07,480 --> 00:18:12,680
New Crest generated cumulative
cumulative free cash flow over

336
00:18:12,680 --> 00:18:17,120
that five year period, 2010 to
14 of -2 1/2 billion dollars.

337
00:18:17,880 --> 00:18:20,960
Operationally there.
There wasn't a single year after

338
00:18:20,960 --> 00:18:25,600
completion until New Crest got
taken over in 2023 that

339
00:18:25,600 --> 00:18:29,440
production met or even got close
to really that target that they

340
00:18:29,440 --> 00:18:33,000
set in 2010.
Not a single year in in 14

341
00:18:33,000 --> 00:18:36,360
years.
So here's an asset that's, you

342
00:18:36,360 --> 00:18:38,760
know, still still producing for
the Newmont.

343
00:18:38,760 --> 00:18:41,520
So it's not a complete lot in
these sorts of prices.

344
00:18:41,520 --> 00:18:44,960
It, it makes money again, that's
that's kind of why it's ranked

345
00:18:44,960 --> 00:18:47,800
5th.
But the the opportunity cost

346
00:18:47,800 --> 00:18:49,920
there is just massive and I
think it's the sort of

347
00:18:49,920 --> 00:18:53,320
quintessential example of that
2010 era gold M&A.

348
00:18:53,760 --> 00:19:00,400
Yeah, very good Jade deal #4.
Gone to America, BHB buys Magma

349
00:19:00,400 --> 00:19:02,200
copper.
This is the oldest deal on the

350
00:19:02,200 --> 00:19:05,200
list.
This deal happened in late 1995

351
00:19:05,680 --> 00:19:09,800
and amongst other it amongst
other deals that BHB did at the

352
00:19:09,800 --> 00:19:13,560
time, it took the the big
Australian to their knees in the

353
00:19:13,560 --> 00:19:16,080
late 90s, which was really,
really interesting to learn

354
00:19:16,080 --> 00:19:17,360
about.
I'm fascinated mate.

355
00:19:18,200 --> 00:19:21,320
So we'll give a bit of a bit of
context to sort of set the set

356
00:19:21,320 --> 00:19:23,360
the field.
BHB wanted more copper.

357
00:19:23,640 --> 00:19:28,800
The old story come new and as it
is a bit of a theme on this

358
00:19:28,800 --> 00:19:31,720
list, 1995 was an absolute
record year for copper prices.

359
00:19:31,720 --> 00:19:36,720
So it's tear and a head.
It's over $1.30 USA pound.

360
00:19:37,080 --> 00:19:39,920
Now Magma importantly, was not
just a miner that had smelting

361
00:19:39,920 --> 00:19:42,920
capability and BHP didn't have
that.

362
00:19:42,920 --> 00:19:48,720
So that meshing of concentrate
and downstream capacity very

363
00:19:48,720 --> 00:19:52,280
similar to what we're seeing
today with the changes between

364
00:19:52,280 --> 00:19:55,200
who has the power between the
concentrate producer and the the

365
00:19:55,200 --> 00:19:57,760
smelters was a big factor in
this deal.

366
00:19:58,440 --> 00:20:01,920
Magma was a spin out at Newmont.
So they came out in 1987.

367
00:20:02,240 --> 00:20:05,360
They were their own kind of
entity subsidiary that became

368
00:20:05,360 --> 00:20:07,760
its own thing.
They owned 3 mines in

369
00:20:07,800 --> 00:20:10,120
Southeastern Arizona.
Some of these names might be

370
00:20:10,120 --> 00:20:13,160
familiar.
You've got San Manuel that came

371
00:20:13,160 --> 00:20:16,520
with a smelter as well.
Superior and Pinto Valley, and

372
00:20:16,520 --> 00:20:20,760
then you've got Robinson in
Nevada and Tintaya in Peru,

373
00:20:20,760 --> 00:20:23,960
which I'll explain later will
also be familiar to a lot of the

374
00:20:23,960 --> 00:20:26,520
listeners out there.
Very America's focused North

375
00:20:26,520 --> 00:20:28,400
America, a little bit of South
America there.

376
00:20:28,400 --> 00:20:31,880
Yeah, eighth biggest copper
producer in the world.

377
00:20:32,240 --> 00:20:36,640
And there's this this headline
sort of at the time Magma was

378
00:20:36,640 --> 00:20:40,680
the acquisition that BHB had to
make to meet it's voracious

379
00:20:40,680 --> 00:20:44,760
copper demands.
So that, yeah, that that ability

380
00:20:44,760 --> 00:20:49,120
to get the smelting side of the
business can't be understated.

381
00:20:49,120 --> 00:20:51,240
It's a, it's a key part of why
they did this deal.

382
00:20:51,240 --> 00:20:55,720
And the yeah, the San Manuel
smelter in Arizona there was the

383
00:20:55,720 --> 00:20:58,480
biggest in the US and it was
capable of being expanded.

384
00:20:58,480 --> 00:21:01,960
They had big plans for that one.
So that was the the crux of kind

385
00:21:01,960 --> 00:21:05,560
of why they did this deal.
Magma itself had gone through a

386
00:21:05,560 --> 00:21:09,680
really, really tough time in the
80s, but they'd turned that

387
00:21:09,680 --> 00:21:12,640
around coming into the 90s and
they up into this deal, those

388
00:21:12,640 --> 00:21:14,520
sort of five years were making
really good money.

389
00:21:15,440 --> 00:21:18,000
All type well record high copper
price probably helped to that.

390
00:21:18,360 --> 00:21:19,120
Period.
Massively.

391
00:21:19,480 --> 00:21:20,680
No surprise.
What was the deal?

392
00:21:21,680 --> 00:21:28,040
So BHB pays over Aussie $3.2
billion and Magma came with US

393
00:21:28,040 --> 00:21:30,080
600 million in debt.
Gotcha.

394
00:21:30,080 --> 00:21:31,400
They've assumed the debt.
Yeah, yeah.

395
00:21:31,560 --> 00:21:35,760
So this makes BHB the largest,
largest publicly traded copper

396
00:21:35,760 --> 00:21:38,680
producer in the world with about
10% of world production.

397
00:21:39,400 --> 00:21:43,000
They paid a 30 odd percent
premium kind of the the standard

398
00:21:43,000 --> 00:21:46,640
and it was relatively clean
because they got that off well

399
00:21:46,640 --> 00:21:49,760
known U.S. group Warburg Pincus
in the sort of banking world

400
00:21:49,760 --> 00:21:52,080
there.
They paid cash for this deal

401
00:21:52,400 --> 00:21:55,600
mostly using their cash
reserves, but they also tapped

402
00:21:55,600 --> 00:22:00,640
up their existing credit line.
So if you annualize Magma's

403
00:22:00,640 --> 00:22:02,720
previous quarter's earnings,
they're coming out at about US

404
00:22:02,760 --> 00:22:06,120
200 million.
And like you said, Trev, you

405
00:22:06,120 --> 00:22:08,600
know, we're talking about a time
with record prices.

406
00:22:08,600 --> 00:22:12,040
So given how much they paid, it
already looks pretty chunky

407
00:22:12,040 --> 00:22:15,440
already factoring a fair bit of
a fair bit of growth.

408
00:22:15,440 --> 00:22:19,320
And there was this sort of New
York Times headline from a quote

409
00:22:19,320 --> 00:22:22,200
from I think a broker at the
time saying I couldn't believe

410
00:22:22,200 --> 00:22:27,280
they paid 3.2 billion so.
So it's 16 times earnings, yeah.

411
00:22:27,400 --> 00:22:30,640
Yeah.
Doesn't look good in U In US

412
00:22:30,680 --> 00:22:36,040
it's Oh yeah, two yeah 2.4 so
it's 12. 200 million. 12 * 12

413
00:22:36,040 --> 00:22:39,480
times peak peak earnings yeah,
yeah.

414
00:22:40,120 --> 00:22:45,680
With that debt coming in it, it
screened a bit expensive, so.

415
00:22:46,120 --> 00:22:50,800
As I wear Did it go to shit, JD?
So this one is a bit unique

416
00:22:50,800 --> 00:22:52,320
versus the other ones I'm going
to talk about.

417
00:22:52,320 --> 00:22:54,520
The first thing I'm going to
focus on is the cultural

418
00:22:54,520 --> 00:22:58,400
disaster that this one was.
There were serious failures to

419
00:22:58,400 --> 00:23:02,000
integrate the the team and
manage the mines appropriately.

420
00:23:02,000 --> 00:23:04,880
So obviously this one happened a
long time ago.

421
00:23:04,880 --> 00:23:06,720
I'm working off a lot of
commentary that was given by

422
00:23:06,720 --> 00:23:09,920
people that worked at Magma
Copper as well as at BHB at the

423
00:23:09,920 --> 00:23:11,880
time.
But Magma had a super regional

424
00:23:12,200 --> 00:23:14,680
Arizona identity, as I sort of
understand it.

425
00:23:15,120 --> 00:23:18,400
And worlds away you've got BHB
execs making the calls.

426
00:23:18,400 --> 00:23:23,040
So you could add to that the the
argument that BHB has a bit of a

427
00:23:23,040 --> 00:23:26,280
bulk mining mindset.
I think that's kind of

428
00:23:26,720 --> 00:23:28,800
warranted.
They made a lot of their money

429
00:23:28,800 --> 00:23:30,880
obviously, and iron ore as well
as energy.

430
00:23:30,880 --> 00:23:35,040
So what they were doing here was
not what they were doing.

431
00:23:35,720 --> 00:23:39,080
You know, it wasn't their sort
of classical way of operating.

432
00:23:39,080 --> 00:23:40,920
It needed a bit of different
thinking and it didn't really

433
00:23:40,920 --> 00:23:43,200
get that.
So a lot of accusations of BHB

434
00:23:43,200 --> 00:23:46,960
being pretty arrogant and a bit
too rigid in their management in

435
00:23:46,960 --> 00:23:49,760
this one.
You've also got to look at the

436
00:23:49,760 --> 00:23:53,480
the fundamental issues with the
DD that BHB undertook.

437
00:23:53,480 --> 00:23:57,720
And what I'm kind of getting at
is the assumptions for how much

438
00:23:57,720 --> 00:23:59,680
better they thought they could
run the assets than was

439
00:23:59,680 --> 00:24:01,960
currently being run.
And I think that ties in with

440
00:24:02,280 --> 00:24:05,680
the arrogance kind of point in a
way they they thought they knew

441
00:24:05,680 --> 00:24:08,040
a lot better than the locals on
the ground there.

442
00:24:08,040 --> 00:24:12,320
And I think this comment from a
Magma exec just captures it

443
00:24:12,320 --> 00:24:15,400
perfectly.
Magma had mediocre, mediocre

444
00:24:15,400 --> 00:24:20,600
assets run extraordinarily.
BHB had extraordinary assets run

445
00:24:20,600 --> 00:24:24,240
mediocrely.
So that to me just tease it up

446
00:24:24,240 --> 00:24:27,520
kind of perfectly.
So adding to those cultural

447
00:24:27,520 --> 00:24:30,760
challenges, you've got the
commodity cycle.

448
00:24:31,080 --> 00:24:34,760
They bought this asset at all
time high price and that's

449
00:24:34,760 --> 00:24:37,160
usually not a recipe for
success.

450
00:24:37,160 --> 00:24:42,160
So no, no exceptions here.
And it's like you sort of see

451
00:24:42,160 --> 00:24:45,400
often in the corporate world,
the, the sensor FOMO is not that

452
00:24:45,400 --> 00:24:47,960
different to your regular kind
of retail hunter.

453
00:24:47,960 --> 00:24:49,680
Everyone, everyone's human at
the end of the day.

454
00:24:49,680 --> 00:24:53,240
And that was very much a a
factor in this deal.

455
00:24:53,840 --> 00:24:58,120
Copper was trading near $0.60
ultimately when BHB pulled the

456
00:24:58,120 --> 00:25:01,480
pin and it was not a long time
later, that was just a a short

457
00:25:01,480 --> 00:25:03,720
few years later.
So their conservative assumption

458
00:25:03,720 --> 00:25:08,040
in this deal was that copper
would not fall below $1.00 a

459
00:25:08,040 --> 00:25:11,280
pound.
And in reality these assets at

460
00:25:11,280 --> 00:25:15,560
$0.95 were losing money.
So it, it was very interesting

461
00:25:15,560 --> 00:25:18,960
for me to learn that copper hit
a century low in inflation

462
00:25:18,960 --> 00:25:23,880
adjusted terms in 2000.
So that completely, completely

463
00:25:23,880 --> 00:25:27,880
whacked them around and you
know, any chance of synergies

464
00:25:27,880 --> 00:25:30,320
were kind of wiped out with the
assets not even running.

465
00:25:30,440 --> 00:25:31,440
So they shut them down.
So.

466
00:25:31,640 --> 00:25:33,960
So they shut, they shut all of
all of the assets down.

467
00:25:34,440 --> 00:25:37,920
Pretty, pretty much, yeah.
Even with LIKE, smelters aren't

468
00:25:37,920 --> 00:25:40,840
easy to to restart.
It it takes, it takes a bit of

469
00:25:40,840 --> 00:25:44,040
time and I think I sort of go
through a couple of the assets,

470
00:25:44,040 --> 00:25:47,200
but I've got very sidetracked
with a couple fascinating

471
00:25:47,200 --> 00:25:49,640
things, right?
So you've got the Asian

472
00:25:49,640 --> 00:25:51,480
financial crisis happening in
1997.

473
00:25:51,480 --> 00:25:54,480
So this added to the fall off in
copper prices.

474
00:25:55,040 --> 00:25:59,680
And there's this story about
this trader at Sumitomo, which

475
00:25:59,720 --> 00:26:03,120
is very, very fascinating in, in
my opinion.

476
00:26:03,400 --> 00:26:05,680
And it is completely shook
around the copper market.

477
00:26:05,680 --> 00:26:09,440
And it impacted BHB in the sense
that earnings obviously just

478
00:26:09,720 --> 00:26:11,760
went through the floor.
This could be worthy of its own

479
00:26:11,760 --> 00:26:13,320
episode.
But Long story short, you've got

480
00:26:13,320 --> 00:26:16,480
this commodity trader from
Sumitomo in Japan.

481
00:26:16,480 --> 00:26:22,000
His name is Yasuo Tamanaka, and
he essentially traded on an

482
00:26:22,000 --> 00:26:25,520
unauthorized account for over a
decade and just hit everything

483
00:26:25,520 --> 00:26:28,720
he did.
This started, you know, as it

484
00:26:28,720 --> 00:26:33,320
tends to with him trying to make
up earnings that he'd had will

485
00:26:33,320 --> 00:26:36,520
make up a loss.
They done in, I want to say

486
00:26:36,720 --> 00:26:41,800
1986, a long time before.
And how he tries to make up

487
00:26:41,800 --> 00:26:44,840
those earnings is by cornering
the copper market using a whole

488
00:26:44,840 --> 00:26:46,960
bunch of futures, warrants and
other instruments.

489
00:26:46,960 --> 00:26:49,520
And this is the copper market
we're talking about.

490
00:26:49,520 --> 00:26:51,440
This is a big market.
It is a big market.

491
00:26:51,440 --> 00:26:57,400
And eventually in about 96, he
manages to get credit lines of

492
00:26:57,400 --> 00:27:01,520
to the sort of tune tune of US
$150 million from over a dozen

493
00:27:01,520 --> 00:27:05,040
banks, like not cumulatively
each.

494
00:27:05,520 --> 00:27:09,280
So this all just employed
massively in mid 96.

495
00:27:09,280 --> 00:27:11,880
And then there's this
investigation at the time to

496
00:27:11,880 --> 00:27:14,600
what's going on in LME
warehouses because the

497
00:27:14,600 --> 00:27:17,720
inventories are just draining
and this kind of sparks are kind

498
00:27:17,720 --> 00:27:20,160
of rushed.
The copper price falls 40% as

499
00:27:20,160 --> 00:27:22,680
Sumitomo try and unwind their
position.

500
00:27:22,920 --> 00:27:26,920
They end up copping AUS $2.8
billion loss in 19. 96 holy

501
00:27:27,360 --> 00:27:28,080
shit.
Yeah.

502
00:27:28,720 --> 00:27:30,320
Wow.
And he's trying to squeeze the

503
00:27:30,320 --> 00:27:32,640
market.
He was trying to squeeze it

504
00:27:32,640 --> 00:27:35,120
higher but it went, it went
completely tips up and then they

505
00:27:35,120 --> 00:27:40,240
had to sell everything.
So oh man, that's that's, that's

506
00:27:40,240 --> 00:27:42,400
an incredible part of history.
Yeah, I know it's going to

507
00:27:42,400 --> 00:27:47,640
happen sooner or later, but
yeah, there's a whole bunch of

508
00:27:47,640 --> 00:27:49,480
other alleys I could get
sidetracked down, but we'll

509
00:27:49,480 --> 00:27:51,960
we'll stay on route here.
Don't worry about that, JD.

510
00:27:52,200 --> 00:27:54,960
This is interesting.
There was a bunch of other

511
00:27:54,960 --> 00:27:58,840
mishaps for BHP that hit him
like a truck all at the same

512
00:27:58,840 --> 00:28:00,920
time.
And I just mentioned a couple of

513
00:28:00,920 --> 00:28:05,200
them, but you've got the HBI
plant, which was a complete and

514
00:28:05,200 --> 00:28:10,000
utter disaster in Port Hedland
and it sadly ended in the loss

515
00:28:10,000 --> 00:28:14,160
of life in with a with an
explosion there in the early

516
00:28:14,160 --> 00:28:18,240
2000s that cost them $2.4
billion.

517
00:28:18,240 --> 00:28:21,360
What's the HBI plan A?
Hot briqueted iron plant.

518
00:28:21,360 --> 00:28:24,480
So, you know, kind of what other
miners are talking about these

519
00:28:24,480 --> 00:28:25,600
days.
They were trying to do that

520
00:28:25,600 --> 00:28:28,680
there.
It was a, you know, $2.4 billion

521
00:28:28,680 --> 00:28:31,040
used to mean something for BHP.
That was a big amount of money

522
00:28:31,040 --> 00:28:34,960
just like this deal.
And that just didn't work

523
00:28:34,960 --> 00:28:37,440
whatsoever.
They had the Hartley Platts mine

524
00:28:37,440 --> 00:28:41,400
in Zimbabwe that cost them $700
million.

525
00:28:42,120 --> 00:28:46,440
Octady Complete and other
disaster, no other kind of way

526
00:28:46,440 --> 00:28:50,760
to put that one that they
eventually got out pretty much

527
00:28:50,760 --> 00:28:52,720
giving away their stake and
paying a heap.

528
00:28:52,720 --> 00:28:55,560
So they can kind of came out
with a $2 billion loss on that

529
00:28:55,560 --> 00:28:58,600
one.
And added to that, you've got

530
00:28:59,040 --> 00:29:02,360
pretty much every copper, I'm
sorry, every commodity in which

531
00:29:02,360 --> 00:29:05,520
they're operating hitting cycle
lows at the same time.

532
00:29:05,800 --> 00:29:08,040
And they had this big theory
that that could never happen and

533
00:29:08,040 --> 00:29:10,600
it did happen and it was a
disaster.

534
00:29:10,600 --> 00:29:14,440
And they reported, get this,
their second ever loss in their

535
00:29:14,440 --> 00:29:18,440
hundred year plus history,
losing $1.5 billion in 1998.

536
00:29:18,800 --> 00:29:20,760
I mean, it's a credit to them
that that's only their second

537
00:29:20,760 --> 00:29:23,640
loss.
But it all came at the wrong

538
00:29:23,640 --> 00:29:27,400
time for for BHB.
God, it's, it's, it's alarming

539
00:29:27,400 --> 00:29:29,680
when you talk about these points
in history and you're like,

540
00:29:29,680 --> 00:29:32,880
shit, imagine if that happened
now, which it could like it's

541
00:29:32,880 --> 00:29:35,360
great because it's happened and
it does happen that you just

542
00:29:35,360 --> 00:29:37,040
never think it's possible, just
like them.

543
00:29:37,200 --> 00:29:40,280
Yeah, I mean think about how
quickly this one unravelled.

544
00:29:40,280 --> 00:29:45,280
550, $1,000,000 in write offs
within a year, like within one

545
00:29:45,280 --> 00:29:48,480
year of having a mine in 1998,
just two years after the deal

546
00:29:48,600 --> 00:29:51,080
had been announced, they wrote
off nearly a billion dollars

547
00:29:51,440 --> 00:29:54,200
more.
The whole deal was completely

548
00:29:54,200 --> 00:29:58,760
written off by 1999 and
including rehab costs, the, you

549
00:29:58,760 --> 00:30:01,040
know, the the losses far
exceeded what they initially

550
00:30:01,040 --> 00:30:03,680
paid.
We're talking over US $4 billion

551
00:30:04,080 --> 00:30:06,080
on this.
The, the operations were never

552
00:30:06,200 --> 00:30:09,440
profitable for any sustained
period at all.

553
00:30:09,960 --> 00:30:12,720
And very unfortunately, it led
to an enormous amount of layoffs

554
00:30:12,760 --> 00:30:17,120
and kind of obliterated the the
community there in Arizona.

555
00:30:17,800 --> 00:30:21,200
And as you'd expect, it led to a
fair bit of animosity toward

556
00:30:21,480 --> 00:30:25,400
BHB.
By 2003, the BHB closed the

557
00:30:25,400 --> 00:30:28,960
Sandman Well copper smelter,
which was the the crown jewel

558
00:30:28,960 --> 00:30:32,080
and that ended A50 year history
of, of operating there.

559
00:30:32,080 --> 00:30:34,400
So there's a bit of a silver
lining though.

560
00:30:34,920 --> 00:30:37,920
They did manage to sell during
the next copper up cycle in the

561
00:30:37,920 --> 00:30:42,280
China boom, the entire copper
project, the US $700 million.

562
00:30:42,880 --> 00:30:46,280
This was sold to Xstrata and
came with anti Pacquia, which

563
00:30:46,440 --> 00:30:48,640
people will know is a big
producing asset for Glencore

564
00:30:48,640 --> 00:30:50,360
now.
So that wasn't being mined at

565
00:30:50,360 --> 00:30:51,640
the time of those 10 kilometers
away.

566
00:30:52,440 --> 00:30:55,560
Pinto Valley was sold to
Capstone Copper a long time

567
00:30:55,560 --> 00:30:58,560
later with all its liabilities
for US $650 million.

568
00:30:59,080 --> 00:31:02,240
But we're talking nearly two
decades after the deal at that

569
00:31:02,240 --> 00:31:06,400
point in time and BH BS
ownership in resolution copper

570
00:31:06,400 --> 00:31:10,240
also comes out of this.
So people thinking maybe sooner

571
00:31:10,240 --> 00:31:11,840
or later that gets put into
production.

572
00:31:11,840 --> 00:31:16,640
But as it stands it's been 20
plus years and billions sunk

573
00:31:16,640 --> 00:31:20,400
into that one.
So the pay off from back then is

574
00:31:20,800 --> 00:31:22,120
it's not a bit you'd want to
take.

575
00:31:23,120 --> 00:31:26,320
So so is resolution below the
old.

576
00:31:26,680 --> 00:31:29,720
Kind of, yeah.
Yeah, Yeah, yeah, right.

577
00:31:29,920 --> 00:31:31,680
Yeah, I think, I think I put a
map somewhere.

578
00:31:31,680 --> 00:31:33,680
It's they're all in that kind of
area.

579
00:31:33,840 --> 00:31:35,240
Resolution is deep.
Yeah, yeah.

580
00:31:35,480 --> 00:31:38,720
So it's in the in the same
ballpark and a few of these

581
00:31:38,720 --> 00:31:42,080
assets change names over time,
which like, infuriated me like

582
00:31:42,080 --> 00:31:43,840
crazy research.
Imagine.

583
00:31:44,200 --> 00:31:46,960
Yeah.
So on the management side of

584
00:31:46,960 --> 00:31:50,800
things, you've got the the
chairman and the CEO both

585
00:31:50,800 --> 00:31:54,880
leaving not long after the deal.
And then as as they put it in

586
00:31:54,880 --> 00:31:57,120
BHP history, they've got the
dynamic duo.

587
00:31:57,200 --> 00:31:59,440
These two Americans, Paul
Anderson and Chip Goodyear came

588
00:31:59,440 --> 00:32:04,640
in, each had a stint as CEO.
Chip was CFO to start with.

589
00:32:05,320 --> 00:32:06,840
They immediately just went on
this program.

590
00:32:06,840 --> 00:32:09,720
They sold about 30 different
assets, raised a bunch of money,

591
00:32:09,720 --> 00:32:13,400
a bunch of other board members
got let go at the same time or

592
00:32:13,400 --> 00:32:17,280
sort of made to to resign.
So this was a hugely influential

593
00:32:17,280 --> 00:32:21,520
period for the BHB and really
changed the mindset from being a

594
00:32:22,280 --> 00:32:25,800
kind of Melbourne based company
to a global company with these

595
00:32:25,800 --> 00:32:27,480
Americans coming in and running
the show.

596
00:32:27,480 --> 00:32:30,920
And company's been quite, quite
different since, you know

597
00:32:31,080 --> 00:32:35,120
between the Magma deal and the
Port Headland disaster, they

598
00:32:35,120 --> 00:32:40,560
lost nearly $7 billion.
So BHP was a less than $20

599
00:32:40,560 --> 00:32:43,400
billion company at the time.
So these were very significant

600
00:32:43,400 --> 00:32:47,680
sums.
And what comes out the back of

601
00:32:47,680 --> 00:32:50,960
this in sort of early in 2000,
2001 time is that they do the

602
00:32:50,960 --> 00:32:56,320
deal with Billiton and that is
done at a a much friendlier

603
00:32:56,320 --> 00:32:59,040
ratio to Billiton than it would
have otherwise been done.

604
00:32:59,200 --> 00:33:02,480
And they not had all these
disasters and Billiton didn't

605
00:33:02,480 --> 00:33:06,640
have great assets, but their
management team came in and and

606
00:33:06,640 --> 00:33:08,080
ran BHB.
Afterwards.

607
00:33:08,760 --> 00:33:11,880
So that's, that's So what, what
did Billiton get as a proportion

608
00:33:11,880 --> 00:33:14,680
of the the pro forma when, when
that deal was ultimately done?

609
00:33:15,080 --> 00:33:18,440
I don't want to say 34%.
Yeah, that sounds, that sounds

610
00:33:18,480 --> 00:33:21,920
familiar.
So even though this deal didn't

611
00:33:21,920 --> 00:33:24,480
come with dilution like the last
one, the impact was still

612
00:33:24,480 --> 00:33:26,800
horribly dilutionary to
shareholders because the

613
00:33:26,800 --> 00:33:30,480
ultimate share for existing BHP
shareholders of the pro forma

614
00:33:30,480 --> 00:33:33,360
BHP Billiton was, yeah,
substantially reduced.

615
00:33:33,360 --> 00:33:34,840
Whacked em.
Yeah.

616
00:33:35,400 --> 00:33:37,080
Wow, that was a juicy one.
Yeah.

617
00:33:37,200 --> 00:33:39,280
And like, what did the share
price look like in this time?

618
00:33:40,560 --> 00:33:44,560
It it fluctuates a lot.
So we go from like 20 bucks in

619
00:33:44,560 --> 00:33:51,040
sort of 98 to 2000 period.
It's $8 at a time, it bounces

620
00:33:51,040 --> 00:33:55,440
around a lot.
And then 2001 two 3-4 kick in

621
00:33:55,640 --> 00:33:59,560
China and it's it's blue skies.
Happy days to everyone.

622
00:34:00,480 --> 00:34:03,840
Yeah.
A quick break to talk about M&A

623
00:34:03,840 --> 00:34:07,360
at Kay Drew, because why
wouldn't you think of the M&A

624
00:34:07,400 --> 00:34:10,639
that happened when they bought
Ron O'Sullivan?

625
00:34:11,600 --> 00:34:14,719
Was he for sale?
I, well, I, I compare Ron

626
00:34:14,719 --> 00:34:16,840
O'Sullivan because I don't know
if he was or he wasn't.

627
00:34:17,239 --> 00:34:21,159
He's voices by voices by the
bloody, the big competition that

628
00:34:21,159 --> 00:34:23,960
Robert Friedland got going for
that nickel asset that was

629
00:34:23,960 --> 00:34:26,440
probably going on in the
background for Ron O'Sullivan.

630
00:34:26,800 --> 00:34:28,400
Cadrill have come up with the
goods.

631
00:34:28,679 --> 00:34:30,639
And what's Ron brought to
Cadrill?

632
00:34:31,000 --> 00:34:34,560
The bloody sample management,
the drill budget management,

633
00:34:34,880 --> 00:34:38,440
everyone wants to work for him
and this was all happening

634
00:34:38,440 --> 00:34:40,480
before we even started talking
about him.

635
00:34:40,480 --> 00:34:44,760
A legend of the drilling
industry and he is a great M and

636
00:34:44,760 --> 00:34:48,800
I play by K Drill.
The Voices Bay of exploration,

637
00:34:48,800 --> 00:34:50,239
drill, exploration.
I see drilling.

638
00:34:50,239 --> 00:34:51,880
He's right.
Still going good.

639
00:34:51,880 --> 00:34:53,360
Yeah, yeah, yeah.
That's all right.

640
00:34:54,719 --> 00:34:56,440
It's more, it's more the bidding
war, right?

641
00:34:56,440 --> 00:34:58,280
People were just tripping over,
weren't they?

642
00:34:58,280 --> 00:35:00,000
Maybe they were tripping over to
get a piece of.

643
00:35:00,000 --> 00:35:02,920
Him but the voices by still
going in a depressed nickel

644
00:35:02,920 --> 00:35:04,920
environment.
So that shows how good Ron

645
00:35:04,920 --> 00:35:06,960
O'Sullivan is effectively.
Why wouldn't you want to trip

646
00:35:06,960 --> 00:35:09,080
over yourself and try and get
hold of Ryan O'Sullivan to drill

647
00:35:09,080 --> 00:35:11,240
some holes for you?
Trip over him while he's

648
00:35:11,240 --> 00:35:13,400
drilling the holes with his
bare, bloody hands.

649
00:35:13,480 --> 00:35:14,480
Right.
OK, drill.

650
00:35:14,480 --> 00:35:16,640
Let's get back to the JD
Spectacular.

651
00:35:16,960 --> 00:35:20,520
Very good, right?
I wouldn't have picked this was

652
00:35:20,520 --> 00:35:23,360
#3 just because it's the one
that seems to get talked about

653
00:35:23,360 --> 00:35:25,400
the most.
Yeah, and this is probably what

654
00:35:25,400 --> 00:35:27,320
sparked my interest in doing
this kind of episode.

655
00:35:27,320 --> 00:35:29,800
Maddie Rio Tinto buys
Riversdale.

656
00:35:30,720 --> 00:35:32,840
Right.
So got Riversdale.

657
00:35:32,840 --> 00:35:35,760
On the one hand, this is a
company created by a well known

658
00:35:35,760 --> 00:35:38,840
operator, Michael O'Keefe and a
few others that were the sort of

659
00:35:38,840 --> 00:35:41,480
founders there.
They're the proud owners of a

660
00:35:41,520 --> 00:35:47,240
65% interest in Bengal coal.
They also own the Zambezi

661
00:35:47,320 --> 00:35:49,160
project as well, which is very
close.

662
00:35:49,160 --> 00:35:52,600
I'll show on a map here Benga
Stage 1, which is under

663
00:35:52,600 --> 00:35:54,480
construction at this point in
time.

664
00:35:55,160 --> 00:35:57,280
It's targeting a bit over 5
million tons per annum.

665
00:35:57,800 --> 00:36:03,280
Coal production stages two and
three are targeting a further

666
00:36:03,280 --> 00:36:05,720
roughly 15, so they'll take them
up to 20 million tons.

667
00:36:06,080 --> 00:36:09,600
Those two stages are PFS.
Then you've got the Zambezi

668
00:36:09,600 --> 00:36:12,440
conceptual mine, which is, you
know, just blue sky.

669
00:36:12,440 --> 00:36:15,960
I meant to add over 40 million
tons per annum to the profile to

670
00:36:15,960 --> 00:36:20,400
really beef it out.
This is all in the Motis Basin

671
00:36:20,440 --> 00:36:24,080
in Mozambique, which will make a
lot more sense if you look at

672
00:36:24,080 --> 00:36:27,720
the map there.
The Bengar project reportedly

673
00:36:27,720 --> 00:36:31,640
held 14 billion tons of hard
cooking coal at a time when

674
00:36:32,000 --> 00:36:34,680
cooking coal was fetching record
prices.

675
00:36:35,680 --> 00:36:37,760
That was to do with China and
everything.

676
00:36:37,760 --> 00:36:41,640
But you also had this flood in
the in the bond basin, which was

677
00:36:42,600 --> 00:36:44,760
giving a bit of a supply shock
to the market.

678
00:36:45,280 --> 00:36:49,120
So to round out the interests,
you've got Tata Steel, who will

679
00:36:49,120 --> 00:36:52,120
play a key role.
They own the other 35% of the

680
00:36:52,120 --> 00:36:55,880
operations.
They also own 26% of Riversdale

681
00:36:55,880 --> 00:36:57,880
stock.
They're very key in this

682
00:36:57,880 --> 00:36:59,920
takeover battle.
And you've also got this

683
00:36:59,920 --> 00:37:04,080
Brazilian group CSN, they own a
bit under 20%.

684
00:37:04,440 --> 00:37:08,840
So Riversdale, here's a fun
fact, also owned an operating

685
00:37:08,840 --> 00:37:13,880
asset that produced 700,000 tons
per annum in South Africa.

686
00:37:14,400 --> 00:37:16,880
This was the asset that was
bought by none other than Vu

687
00:37:16,880 --> 00:37:20,360
Slate, who we just interviewed
in in South Africa.

688
00:37:20,480 --> 00:37:22,840
Yeah, so he buys this one off
Rio in due course.

689
00:37:23,560 --> 00:37:26,200
So it all comes together.
Oh, there you go, you added that

690
00:37:26,200 --> 00:37:28,800
bit in after the Indava trip.
Well, I had that in there and

691
00:37:28,800 --> 00:37:30,800
then I added the name I was.
Like, oh, that's you.

692
00:37:32,240 --> 00:37:37,200
It all came together.
So the deal itself, it's a a bit

693
00:37:37,200 --> 00:37:39,600
of a Christmas present.
December 23rd, 2010.

694
00:37:40,440 --> 00:37:43,520
Wow.
Riversdale shareholders get, you

695
00:37:43,520 --> 00:37:44,960
know, under the gift of all
gifts.

696
00:37:44,960 --> 00:37:47,360
They'd been speculation building
for some time.

697
00:37:47,360 --> 00:37:49,920
And you'll see in the share
price chart that I'll show you

698
00:37:49,920 --> 00:37:52,320
here what it had kind of done to
the stock.

699
00:37:52,840 --> 00:37:56,200
It was revealed in I think April
of that year that Rio's head of

700
00:37:56,200 --> 00:38:00,920
energy recommended to the board
that they should try and acquire

701
00:38:01,160 --> 00:38:05,880
Mozambique coal assets with
obviously these guys, Riversdale

702
00:38:05,880 --> 00:38:10,440
being the key kind of company in
that area that was playable.

703
00:38:11,240 --> 00:38:15,720
Rio agreed a $16.00 share price
valuing the the fully diluted

704
00:38:15,720 --> 00:38:22,920
equity at Aussie $3.9 billion,
so a 46% premium to the

705
00:38:22,960 --> 00:38:25,240
undisturbed V WAP on this
company.

706
00:38:25,240 --> 00:38:30,040
And this was Rio's biggest deal
since Alcan in the takeover

707
00:38:30,040 --> 00:38:32,520
announcement.
You've got them sort of saying

708
00:38:32,520 --> 00:38:35,480
that the Benga project is
expected to commence coal

709
00:38:35,480 --> 00:38:41,120
production in September 2011 and
Zambezi would start sometime

710
00:38:41,120 --> 00:38:43,840
after 2014.
Gotcha.

711
00:38:43,840 --> 00:38:47,600
So they're, they're thinking
we're buying this with nine

712
00:38:47,600 --> 00:38:50,000
months left to, to production.
Yeah.

713
00:38:50,000 --> 00:38:52,360
This thing's in construction and
it's going to be producing coal

714
00:38:52,600 --> 00:38:55,120
very soon and we're going to
start to bear fruit on this

715
00:38:55,120 --> 00:38:57,920
price tag because it's a Ripper
coal pricing environment.

716
00:38:58,800 --> 00:39:02,880
The deal wasn't done though.
So by March of 2011, Rio had to

717
00:39:02,880 --> 00:39:05,960
up their bid by $0.50 to 16
bucks 50.

718
00:39:06,400 --> 00:39:08,680
They said that's as high as we
go and this takes it a bit over

719
00:39:09,360 --> 00:39:12,840
a billion dollars EV of $3.5
billion.

720
00:39:12,840 --> 00:39:16,280
Given those about 500 million in
cash on the company to fund the

721
00:39:16,280 --> 00:39:20,040
rest of their construction.
Rio went unconditional and it's

722
00:39:20,040 --> 00:39:23,840
then trying to win out with Tata
Steel as well as that other

723
00:39:23,840 --> 00:39:27,200
group, CSN.
And in due course, they get

724
00:39:27,200 --> 00:39:30,640
there, they get CSN over the
line 1st and then it takes about

725
00:39:30,640 --> 00:39:33,360
half a year from when they first
announce it, but they take the

726
00:39:33,360 --> 00:39:36,440
stake off Tata, who didn't want
to be part of this without a

727
00:39:36,440 --> 00:39:38,520
sort of proper JV structure to
it.

728
00:39:38,520 --> 00:39:42,080
So they just sell into it.
And Rio put in place this

729
00:39:42,080 --> 00:39:45,520
strategic objective, 25,000,000
tons per annum of hard cooking

730
00:39:45,520 --> 00:39:48,000
coal by 2020.
So a bit of a ways down the

731
00:39:48,000 --> 00:39:50,520
track, but that's what they're
striving for.

732
00:39:51,280 --> 00:39:54,720
Are they, are they thinking, you
know, we're seeing this enormous

733
00:39:55,440 --> 00:39:59,080
growth of demand for our iron
ore coming out of the Pilbara.

734
00:39:59,080 --> 00:40:02,560
We, we need, we need to beef up
our high cooking coal portfolio

735
00:40:02,560 --> 00:40:05,320
to, to, to match that.
And and you know, we'll have,

736
00:40:05,760 --> 00:40:07,880
we'll be supplying all of the,
all the things that go into this

737
00:40:08,080 --> 00:40:10,160
huge steel demand.
Yeah, In a nutshell, they have

738
00:40:10,160 --> 00:40:12,760
this strategy of just servicing
China.

739
00:40:13,080 --> 00:40:18,280
And previously that strategy had
been aluminium, iron ore,

740
00:40:18,640 --> 00:40:23,520
copper, and then yeah, coal gets
added to to the piece to to fill

741
00:40:23,520 --> 00:40:27,480
out that growing demand profile
and be in the next hot basin for

742
00:40:27,480 --> 00:40:30,240
for coal Mozambique.
So what could go wrong here

743
00:40:30,240 --> 00:40:32,280
mate?
A lot of things could go wrong

744
00:40:32,280 --> 00:40:36,560
in this case, so the commodity
price wasn't super friendly as

745
00:40:36,560 --> 00:40:39,000
you'd kind of suspect given it
was at record highs.

746
00:40:39,360 --> 00:40:42,960
But it was the assets themselves
in this case and the the kind of

747
00:40:43,680 --> 00:40:47,320
DDI don't want to be too hard
and say that the lack of DD

748
00:40:47,320 --> 00:40:51,640
because they they were suspect
of the numbers that had been put

749
00:40:51,640 --> 00:40:55,360
to market by Riversdale.
And you also find out from all

750
00:40:55,360 --> 00:41:00,160
these court documents later that
it wasn't universal love of this

751
00:41:00,160 --> 00:41:03,320
deal within Rio Tinto.
Not every voice was probably

752
00:41:03,320 --> 00:41:06,760
heard to as it may have, you
know, as it probably should have

753
00:41:06,760 --> 00:41:09,240
been.
But it's not as if everyone

754
00:41:09,240 --> 00:41:10,640
loved it.
But at the end of the day,

755
00:41:10,640 --> 00:41:12,840
that's kind of how deals always
end up happening in a big

756
00:41:12,840 --> 00:41:14,480
company.
You don't tend to have everyone

757
00:41:14,480 --> 00:41:16,960
on board.
Look at these maps here.

758
00:41:16,960 --> 00:41:19,600
And this is where it gets
really, really interesting and

759
00:41:19,600 --> 00:41:23,320
how it just didn't stack up from
a logistical kind of sense.

760
00:41:23,760 --> 00:41:26,640
The project lay a few 100
kilometers inland along the

761
00:41:26,640 --> 00:41:30,000
Zambezi River.
Now you've got this one railway

762
00:41:30,000 --> 00:41:33,320
line which is meant to take it
to this port a bit under 600

763
00:41:33,320 --> 00:41:36,280
kilometers.
This had 5 million tons per

764
00:41:36,280 --> 00:41:38,280
annum capacity.
This was meant to fully service

765
00:41:38,280 --> 00:41:41,480
Stage 1.
Riversdale at the time were just

766
00:41:41,480 --> 00:41:43,560
rehabilitating this track.
They weren't actually building

767
00:41:43,560 --> 00:41:45,360
it new.
It had been a historic track.

768
00:41:45,880 --> 00:41:49,120
You've then got this other one
going in a slightly different

769
00:41:49,120 --> 00:41:52,040
direction, a longer route, 900
kilometers.

770
00:41:52,040 --> 00:41:54,640
This one's meant to run through
Malawi, which makes it a bit

771
00:41:54,640 --> 00:41:57,280
more complex.
And now this is what valet who

772
00:41:57,280 --> 00:42:00,280
were neighbors there used for
their operations.

773
00:42:00,960 --> 00:42:03,320
That had a few challenges with
it.

774
00:42:04,120 --> 00:42:06,520
But here's the big one and the
kind of most eye-catching one.

775
00:42:06,960 --> 00:42:10,640
They wanted to barge a
tremendous amount of coal down

776
00:42:10,640 --> 00:42:13,360
the river.
So this would be a 520 kilometer

777
00:42:13,760 --> 00:42:17,360
trip to the coast.
Riversdale had been testing

778
00:42:17,360 --> 00:42:18,120
this.
This was part of their

779
00:42:18,120 --> 00:42:20,880
feasibility studies for stage 2
and stage 3.

780
00:42:22,080 --> 00:42:26,120
The the deal assumed that they
would in time be able to would

781
00:42:26,120 --> 00:42:30,600
be able to barge 30 million tons
per annum down the Zambezi.

782
00:42:31,200 --> 00:42:33,440
And everyone that anyone that's
kind of seen the Zambezi can see

783
00:42:33,440 --> 00:42:36,520
it's a massive, massive
following river.

784
00:42:37,040 --> 00:42:41,000
But that is an enormous amount
to be barging any river.

785
00:42:41,000 --> 00:42:44,720
So yeah, that was a very big
assumption.

786
00:42:44,720 --> 00:42:47,400
And added on top of that they
wanted to be railing 12 to

787
00:42:47,400 --> 00:42:51,320
15,000,000 tons down the track.
This is sort of twenty 20s time

788
00:42:51,320 --> 00:42:52,320
frame that they're putting on
that.

789
00:42:52,720 --> 00:42:57,840
But yeah, that's sort of check
one on the big assumptions. 2

790
00:42:58,160 --> 00:42:59,880
was the quality of the coal
itself.

791
00:43:00,080 --> 00:43:05,080
So they assumed about 60% would
be hard cooking coal, and that

792
00:43:05,080 --> 00:43:09,080
didn't pan out either.
So this timeline starts slipping

793
00:43:09,080 --> 00:43:12,240
very soon after the deal.
It went from being that

794
00:43:12,240 --> 00:43:17,160
September 2011 quarter to
December to March by the first

795
00:43:17,160 --> 00:43:20,040
half of that year, 2012.
Now they just need to get

796
00:43:20,040 --> 00:43:23,600
something on a rail cart and get
it out so that they can say

797
00:43:23,600 --> 00:43:27,560
they've met first production.
But you know, the it's in the

798
00:43:27,560 --> 00:43:29,800
detail here.
Efficient transportation is a

799
00:43:29,800 --> 00:43:31,040
priority.
The front page of that

800
00:43:31,040 --> 00:43:34,400
announcement, they knew things
weren't going well on that front

801
00:43:35,720 --> 00:43:38,880
into the next quarter.
So we're in late 2012 now.

802
00:43:39,600 --> 00:43:43,440
The railway continues to be a
bottleneck at the end of that

803
00:43:43,440 --> 00:43:46,240
year, the final quarter, it's
still just 100,000 tons.

804
00:43:46,240 --> 00:43:48,440
That's nowhere near what it
should be.

805
00:43:49,520 --> 00:43:53,040
And then bang, you get this
massive bombshell that Rio drops

806
00:43:54,400 --> 00:43:56,720
after providing, to be honest,
pretty scant information.

807
00:43:56,720 --> 00:43:59,600
You're able to do that when you
Rio Tinto on the actual state of

808
00:43:59,600 --> 00:44:04,120
the operations for most of 2012,
they come out and say Rio

809
00:44:04,120 --> 00:44:07,920
expects to recognize 3 billion
U.S. dollar impairment on

810
00:44:07,920 --> 00:44:11,120
Mozambique coal.
This is less than 18 months

811
00:44:11,440 --> 00:44:15,400
after the deal was wrapped.
And what they pay for they pay 4

812
00:44:15,400 --> 00:44:16,680
billion ish.
Wow.

813
00:44:17,240 --> 00:44:19,320
Then pass your working capital
and.

814
00:44:19,360 --> 00:44:21,600
And they sunk a shit load of
money into that thing.

815
00:44:21,720 --> 00:44:27,240
Like, yeah, so obviously that
that wasn't all, just everything

816
00:44:27,240 --> 00:44:29,400
going wrong at the operational
side.

817
00:44:29,400 --> 00:44:32,160
You had the commodity price,
which forces the impairments

818
00:44:32,160 --> 00:44:35,040
often, and you have to reassess
it against your carrying value.

819
00:44:35,760 --> 00:44:38,240
But they admitted that the
development of the

820
00:44:38,240 --> 00:44:41,120
infrastructure to support the
coal was way more challenging

821
00:44:41,120 --> 00:44:43,560
than they had originally
anticipated.

822
00:44:43,960 --> 00:44:47,040
And to cap it off, they hadn't
even got approvals to barge

823
00:44:47,040 --> 00:44:49,560
anything.
So even if it was feasible,

824
00:44:49,720 --> 00:44:54,280
which it wasn't, to barge 10
million tons down, the

825
00:44:54,280 --> 00:44:56,160
government was saying, no,
you're not doing it.

826
00:44:56,760 --> 00:45:00,840
So this leads to a whole bunch
of headaches because Rio knew

827
00:45:00,840 --> 00:45:02,840
about this way before they told
the market.

828
00:45:03,160 --> 00:45:06,880
You got the Rio VP of logistics
believing that the absolute

829
00:45:06,880 --> 00:45:09,800
limit they could potentially do
would be 10 million tons while

830
00:45:09,800 --> 00:45:12,160
they're talking about this up to
30 kind of number.

831
00:45:12,840 --> 00:45:15,760
And you've got yeah,
hydrogeological constraints and

832
00:45:15,760 --> 00:45:19,800
a whole other, a whole box of
other constraints physically

833
00:45:19,800 --> 00:45:21,320
that would stop you from doing
so.

834
00:45:21,400 --> 00:45:26,360
So to to put the boot in, they
they say that the reserves far

835
00:45:26,360 --> 00:45:28,680
less than what their DD had even
estimated.

836
00:45:29,200 --> 00:45:32,880
And if you think that their DD
had estimated reserves being

837
00:45:32,880 --> 00:45:36,880
half of what Riversdale had put
out as reserves, you get a a

838
00:45:36,880 --> 00:45:40,360
relatively small number.
And again, that quality of coal

839
00:45:40,360 --> 00:45:42,600
was less than anticipated as
well.

840
00:45:42,840 --> 00:45:46,720
So a year later you get another
half a billion dollar US write

841
00:45:46,720 --> 00:45:48,320
down.
Jesus.

842
00:45:48,320 --> 00:45:49,000
Disaster.
So.

843
00:45:49,080 --> 00:45:51,360
So what were the final numbers
of what the reserves actually

844
00:45:51,360 --> 00:45:54,720
were?
They they came in at about 3

845
00:45:54,720 --> 00:45:58,200
billion.
Jesus and Riversdale had claimed

846
00:45:58,200 --> 00:45:59,480
13.
Yes.

847
00:46:00,760 --> 00:46:04,160
Yeah, that's nasty.
It's in the the logistics

848
00:46:04,160 --> 00:46:06,040
constraint.
So they're they were trying to

849
00:46:06,040 --> 00:46:09,360
refurb an old grail.
Did that just prove to be like

850
00:46:09,560 --> 00:46:13,760
impossible to to do to to the
capacity that they wanted?

851
00:46:13,760 --> 00:46:16,720
Yeah, to the capacity they they
wanted, they couldn't, they

852
00:46:16,720 --> 00:46:21,160
couldn't get there, but it just
wasn't economic to do it.

853
00:46:21,280 --> 00:46:23,320
At the end of the day.
They could have if they sunk

854
00:46:23,760 --> 00:46:26,600
even more money, but with the
commodity price falling off with

855
00:46:26,600 --> 00:46:31,000
the coal not really being there.
Because coal then embarks on

856
00:46:31,000 --> 00:46:35,400
this like decade, almost decade
long trend of just going like

857
00:46:35,440 --> 00:46:38,040
lower and lower and lower.
Yeah, Yeah.

858
00:46:38,040 --> 00:46:40,840
Look, you can see this chart.
I'll, I'll, I'll Chuck in.

859
00:46:41,640 --> 00:46:45,640
It's to the commodity lows at
early 2016, just a one way sort

860
00:46:45,640 --> 00:46:49,960
of straight, which is not good
for anyone involved in the

861
00:46:49,960 --> 00:46:52,920
industry at that point in time.
Jesus, look at a gal off in

862
00:46:53,560 --> 00:46:55,440
2017.
But that's unbelievable.

863
00:46:55,560 --> 00:47:00,280
Yeah, yeah.
Talk a bit about the the

864
00:47:00,280 --> 00:47:03,440
Riversdale sellers who who did
quite well so.

865
00:47:03,440 --> 00:47:05,400
What was the fallout from it,
JD?

866
00:47:05,560 --> 00:47:09,080
So obviously got the impairments
that looks pretty rough.

867
00:47:09,080 --> 00:47:12,120
They ended up selling the assets
in 2014, just a few years later

868
00:47:12,120 --> 00:47:16,200
for 50 million bucks.
Wow. 2016 they sell that South

869
00:47:16,200 --> 00:47:17,920
African operation that was
undisclosed.

870
00:47:18,920 --> 00:47:20,560
What happens to the the
Riversdale guys?

871
00:47:20,560 --> 00:47:24,440
You've got O'Keefe merge this
business merged a business

872
00:47:24,440 --> 00:47:26,320
rather, and chaired Champion
Iron.

873
00:47:26,320 --> 00:47:29,000
So he's doing quite well for
himself these days.

874
00:47:29,480 --> 00:47:32,080
They picked up a sort of
reincarnation.

875
00:47:32,080 --> 00:47:34,040
They could have called it
Riversdale again.

876
00:47:34,040 --> 00:47:36,400
They picked up Grassy Mountain,
which they sold to Gina for 600

877
00:47:36,400 --> 00:47:38,680
million bucks, 2019.
A few people might remember that

878
00:47:38,680 --> 00:47:42,720
one, but here's a cracking quote
from one of the other founders

879
00:47:42,720 --> 00:47:45,120
of Riversdale.
We were a company with 500

880
00:47:45,120 --> 00:47:49,120
million bucks in cash at rail
port wagons, and the mine was

881
00:47:49,120 --> 00:47:51,280
already developed.
The wash plant was going and

882
00:47:51,280 --> 00:47:58,120
they still managed to screw it.
Yeah, Rio paid a heap of

883
00:47:58,400 --> 00:48:01,160
different settlements with the
SSA, with people in London, with

884
00:48:01,200 --> 00:48:05,040
ASIC as well for their lack of
disclosure and hence a lot of

885
00:48:05,040 --> 00:48:08,440
info came out of this deal
because of all the court orders.

886
00:48:08,440 --> 00:48:10,280
So that was very interesting to
kind of read into.

887
00:48:10,360 --> 00:48:14,720
But there was this kind of one
bit where the internal technical

888
00:48:14,720 --> 00:48:17,520
team is starting to run the
numbers, I think only in 2012,

889
00:48:17,520 --> 00:48:23,440
and they come up with a negative
300 million to like -5 negative

890
00:48:23,440 --> 00:48:27,920
5 billion NPV for the project a
year or so after they bought it.

891
00:48:28,160 --> 00:48:32,880
So there's a tense emails sent
around as you were able to read

892
00:48:32,880 --> 00:48:36,480
a bit later.
It must have been, yeah, like a

893
00:48:37,240 --> 00:48:40,480
a real hard look at yourself
internally at A, at a company's

894
00:48:40,480 --> 00:48:43,600
biggest Rio Tinto when, when
something as substantial as this

895
00:48:43,600 --> 00:48:47,400
just kind of gets across the
board approvals from a technical

896
00:48:47,400 --> 00:48:50,520
perspective.
Yeah, yeah, absolutely.

897
00:48:50,520 --> 00:48:54,560
The the CEO who was sacked and
it's kind of make more sense

898
00:48:54,560 --> 00:48:56,400
when I talk about the other
stuff, but there was a lot of

899
00:48:56,400 --> 00:48:59,680
factors going on here, said on
the Riversdale front.

900
00:48:59,680 --> 00:49:03,440
The biggest fault at his feet
was that the the resource and

901
00:49:03,440 --> 00:49:05,320
reserve didn't stack up if
you're trying to sort of piece

902
00:49:05,320 --> 00:49:08,560
together all the all the various
things that went wrong on on

903
00:49:08,560 --> 00:49:11,360
this front.
But you know, there was there

904
00:49:11,360 --> 00:49:15,920
was faults in a lot of different
parts, commodity cycle DD.

905
00:49:17,040 --> 00:49:19,680
I think the saving grace is the
relative size of this deal

906
00:49:19,920 --> 00:49:23,760
versus Rio, like Rio's booming
coming, you know, in that sort

907
00:49:23,760 --> 00:49:26,000
of 2010 period, again, like most
miners were.

908
00:49:26,280 --> 00:49:32,040
So while it was a insanely
abrupt write off it, it didn't

909
00:49:32,040 --> 00:49:34,320
kill the company by any stretch.
Obviously so, but.

910
00:49:34,640 --> 00:49:36,880
It did 'cause people to fall on
their sword.

911
00:49:37,360 --> 00:49:39,520
It did indeed.
The yeah, a lot of the

912
00:49:39,520 --> 00:49:41,520
management team were gone when
those write outs happened.

913
00:49:41,720 --> 00:49:43,800
Write downs happened.
They're right.

914
00:49:44,040 --> 00:49:48,160
God is.
So is that deposit being mined

915
00:49:49,280 --> 00:49:55,960
or did it get mined eventually?
Those deposits I want to say in

916
00:49:55,960 --> 00:50:01,680
Tata Steel's hands again, yeah,
Roller, very interesting cycle

917
00:50:01,680 --> 00:50:05,640
here, Ken, Ken Talbot, there's
very interesting history through

918
00:50:05,640 --> 00:50:09,560
the the 2000s sort of Queens and
coal magnate.

919
00:50:10,120 --> 00:50:14,240
He'd had his feet in these
assets as well and ended up kind

920
00:50:14,240 --> 00:50:16,080
of selling out a bit before a
deal deal here.

921
00:50:16,120 --> 00:50:18,080
He was a billionaire anyway, so
it didn't matter.

922
00:50:18,080 --> 00:50:22,480
But these assets had a lot of
interesting history and the

923
00:50:22,480 --> 00:50:25,040
related ones, you know, the the
tenements and what sort of

924
00:50:25,040 --> 00:50:27,200
touches on them in other parts
as well.

925
00:50:28,040 --> 00:50:32,440
A long history but not being
mine to the standard then I

926
00:50:32,440 --> 00:50:35,720
thought they would be no.
Right, it's good stuff, right?

927
00:50:36,640 --> 00:50:39,440
Deal #2 Now you probably could
have taken your pick from this

928
00:50:39,440 --> 00:50:41,960
company.
I could have, yeah.

929
00:50:41,960 --> 00:50:44,280
St.
Barbara buys Atlantic Gold deal

930
00:50:44,280 --> 00:50:47,240
#2 This is the most recent deal
on the list.

931
00:50:47,240 --> 00:50:49,280
And normally you'd want to give
it a bit more time, but I think

932
00:50:49,480 --> 00:50:51,880
sort of five or six years is
enough in this case.

933
00:50:51,880 --> 00:50:55,440
But you're quite right, Maddie.
This was a toss up between a

934
00:50:55,440 --> 00:50:59,240
2012 deal, which they did to buy
Allied Gold, which is a complete

935
00:50:59,240 --> 00:51:01,720
clanger.
That was how Siberian Gold Ridge

936
00:51:01,720 --> 00:51:05,120
came into the fold there, had a
90% premium at the top of the

937
00:51:05,120 --> 00:51:07,200
gold market, went horribly
wrong.

938
00:51:07,200 --> 00:51:11,360
But I sort of thought they
ultimately came out of that one

939
00:51:11,360 --> 00:51:15,600
and were able to have a run up
in in share price again and they

940
00:51:15,600 --> 00:51:17,920
had that experience.
They knew what doing a deal was

941
00:51:17,920 --> 00:51:19,320
like in the company.
I know there was different

942
00:51:19,320 --> 00:51:23,360
people and so on, but given
that, I thought I'd talk about

943
00:51:23,360 --> 00:51:27,200
the Atlantic 2019 deal.
So was the Goldridge, Was that

944
00:51:27,200 --> 00:51:30,920
the Solomon assets ones in the
Solomon Islands?

945
00:51:30,920 --> 00:51:33,360
Yes, yeah, yeah.
So.

946
00:51:34,280 --> 00:51:35,600
They've sort of got half of it
still.

947
00:51:35,840 --> 00:51:38,960
Yeah, Yeah, there's a, there's
long, long history as they're

948
00:51:38,960 --> 00:51:42,040
OS, ES with these assets.
So I'll give a bit of context on

949
00:51:42,040 --> 00:51:45,080
this deal.
We're going to March 2019 prior

950
00:51:45,080 --> 00:51:48,400
to the deal, St.
Barbara's kept it a bit under 2

951
00:51:48,400 --> 00:51:53,240
billion Aussie operating Gualia
and Simbiri together with those

952
00:51:53,240 --> 00:51:56,480
assets about 400,000 ounces of
production all in sustaining

953
00:51:56,480 --> 00:52:00,240
costs below 1000 bucks an ounce.
Then you've got Atlantic free

954
00:52:00,240 --> 00:52:03,080
the beard are kept under $600
million.

955
00:52:03,880 --> 00:52:07,280
They operate the Tokwo.
I'm sure I'm pronouncing that

956
00:52:07,280 --> 00:52:09,880
run wrong.
Torquay, Torquay could be could

957
00:52:09,880 --> 00:52:15,520
be in it's sort of part of the
the broader Moose River project

958
00:52:15,520 --> 00:52:19,080
in Far East Canada.
So Nova Scotia is where these

959
00:52:19,080 --> 00:52:22,600
assets sit.
Very importantly, 3 development

960
00:52:22,800 --> 00:52:26,480
stage assets are a part of this.
They play a big role because

961
00:52:26,800 --> 00:52:29,960
they were meant to come online
and they were meant to help them

962
00:52:29,960 --> 00:52:33,280
achieve economies of scale on
those and that shared

963
00:52:33,280 --> 00:52:35,000
infrastructure and pull down the
costs.

964
00:52:35,600 --> 00:52:38,760
So they were doing about 90,000
oz at the time.

965
00:52:38,760 --> 00:52:43,160
Very importantly, the company
sort of promotes 12 year mine

966
00:52:43,160 --> 00:52:48,200
life when they're pitching this
deal, but that operating mine

967
00:52:48,280 --> 00:52:51,440
has only really got 3-4, five
years in it.

968
00:52:51,440 --> 00:52:54,160
So that's factoring in
everything coming on online.

969
00:52:54,880 --> 00:52:58,200
And this was not a commodity
price disaster.

970
00:52:58,480 --> 00:53:03,560
Gold is at US 1300 bucks at the
time and we all know where it is

971
00:53:03,560 --> 00:53:05,880
today so that was not what went
wrong on this front.

972
00:53:07,160 --> 00:53:09,600
Wow, so So what was the actual
deal like?

973
00:53:09,600 --> 00:53:12,800
What did it look like?
It looked like an all cash

974
00:53:13,040 --> 00:53:17,200
consideration of $770 million.
Atlantic had some debt, so the

975
00:53:17,280 --> 00:53:20,400
implied EV is about 850 million
Aussie.

976
00:53:20,400 --> 00:53:22,800
They offered a 40% premium to
get this one over the line.

977
00:53:23,400 --> 00:53:27,120
At the time they launched a
$490,000,000 capital raising, so

978
00:53:27,120 --> 00:53:30,960
they had cash reserves of 380
million and no debt going into

979
00:53:30,960 --> 00:53:34,280
the deal.
They end up signing up this $200

980
00:53:34,280 --> 00:53:37,480
million debt facility as well,
which they don't tap into just

981
00:53:37,480 --> 00:53:40,200
yet.
Atlantic directors controlled

982
00:53:40,200 --> 00:53:44,440
32% of the stock, so that helped
things get wrapped up relatively

983
00:53:44,440 --> 00:53:46,240
quickly.
It's only a bit over two months

984
00:53:46,240 --> 00:53:48,320
from the announcement to the
deal being finished.

985
00:53:49,120 --> 00:53:52,320
What they thought they were kind
of getting into was low cost

986
00:53:52,480 --> 00:53:55,200
operation, spreading their
jurisdictional risk.

987
00:53:55,600 --> 00:53:58,680
And you know that the flavor of
the day then was Ozzy's gone to

988
00:53:58,680 --> 00:54:00,400
North America.
The answers are cheaper over

989
00:54:00,400 --> 00:54:04,040
there and we can do it better.
That's kind of the the mindset

990
00:54:04,040 --> 00:54:06,120
that not not just St.
Barbara had, but a lot of the

991
00:54:06,120 --> 00:54:09,960
miners had at the time and they
were M&A hungry.

992
00:54:09,960 --> 00:54:13,080
Like the CEO said, we have
enough to keep us busy for the

993
00:54:13,080 --> 00:54:15,560
time, but we're looking hard now
that we've got a foothold in the

994
00:54:15,560 --> 00:54:17,760
region.
They were M&A hungry and they

995
00:54:17,760 --> 00:54:21,240
wanted to do deals.
Talking about the share issue,

996
00:54:21,920 --> 00:54:25,880
they hand out this new stock at
2 bucks 89.

997
00:54:26,560 --> 00:54:29,720
It's a pretty standard discount,
but they had been trading over 5

998
00:54:29,720 --> 00:54:34,440
bucks in mid 2018.
Now it was a lot of controversy

999
00:54:34,440 --> 00:54:37,280
about this capital raising.
It did not go smoothly by any

1000
00:54:37,280 --> 00:54:39,880
stretch.
So St.

1001
00:54:39,880 --> 00:54:43,280
Barbara actually ended up
allowing the retail component of

1002
00:54:43,280 --> 00:54:46,240
that to withdraw their bids
because they had a production

1003
00:54:46,240 --> 00:54:48,800
downgrade during the time frame.
So the instant money has been

1004
00:54:48,800 --> 00:54:53,200
taken on board, you've got 130
odd $1,000,000 raise going to

1005
00:54:53,200 --> 00:54:55,000
retail.
Most of them are put the bids in

1006
00:54:55,480 --> 00:54:58,640
and they end up saying how you
can pull them.

1007
00:54:58,880 --> 00:55:00,920
Of course, pretty much everyone
does because at this point

1008
00:55:00,920 --> 00:55:03,440
they're trading well below the
the issue price.

1009
00:55:04,200 --> 00:55:06,720
You got Deutsche Bank as the the
underwriter here.

1010
00:55:06,720 --> 00:55:10,600
And as they tend to do, they've
got a bunch of hedge funds being

1011
00:55:10,600 --> 00:55:13,880
the sub underwriters.
That's very commonplace, but

1012
00:55:14,200 --> 00:55:17,160
it's not so common for it to go
so, so badly wrong.

1013
00:55:17,160 --> 00:55:22,200
A. 135 million bucks is that
retail component, yeah, which is

1014
00:55:22,200 --> 00:55:25,920
underwater.
So about two bucks 89 and the

1015
00:55:25,920 --> 00:55:30,400
stock's trading like 2:50-ish.
So pretty much every retail bid

1016
00:55:30,440 --> 00:55:34,680
was scrapped as you'd imagine,
meaning Deutsche Bank and the

1017
00:55:34,680 --> 00:55:38,400
sub underwriters were on the
hook for $130 million, so they

1018
00:55:38,400 --> 00:55:41,960
had to give that to the company.
And for some unrelated

1019
00:55:41,960 --> 00:55:44,400
interesting history, this will
happen in the same week that

1020
00:55:44,760 --> 00:55:48,800
Daisian lost over 70% of its
market value and gas going went

1021
00:55:48,800 --> 00:55:51,840
into VA.
So there was a lot going on in

1022
00:55:51,840 --> 00:55:54,480
in that week in the gold market.
Holy shit.

1023
00:55:54,880 --> 00:55:56,560
The gold price actually
rebounded.

1024
00:55:56,560 --> 00:55:59,280
So I don't, I don't know what
sort of loss the underwriter and

1025
00:55:59,280 --> 00:56:01,600
sub underwriters had to take on
this, but the stock price

1026
00:56:01,600 --> 00:56:05,800
actually rebounded over the
raised price in over the next

1027
00:56:05,800 --> 00:56:09,160
sort of six month period as we
get to the end of 2019.

1028
00:56:09,160 --> 00:56:12,440
So that's a open-ended question,
which I'm sure a few people know

1029
00:56:12,440 --> 00:56:14,440
the answer to out there.
And this is like when you say

1030
00:56:14,440 --> 00:56:16,880
and look at what they were
trading at, this was all on the,

1031
00:56:16,880 --> 00:56:20,680
this was after they went down to
like $0.05 once they finally saw

1032
00:56:20,680 --> 00:56:24,080
2014 Solomon thing out like the
people that made all those

1033
00:56:24,080 --> 00:56:26,640
truckies at Gwalia that made
that much money.

1034
00:56:26,800 --> 00:56:30,680
But my share is at $0.05.
So they've recovered from all

1035
00:56:30,680 --> 00:56:33,560
that and then got up to, did you
say 5 bucks?

1036
00:56:33,560 --> 00:56:36,840
5 bucks?
Yeah, it's 100 X from those

1037
00:56:36,840 --> 00:56:39,760
lies.
And then this this deal comes

1038
00:56:39,760 --> 00:56:40,760
along.
Yeah.

1039
00:56:40,760 --> 00:56:45,440
So this deal came along, Maddie,
and it did not go well from

1040
00:56:45,440 --> 00:56:47,800
pretty soon into the into the
piece.

1041
00:56:47,800 --> 00:56:52,680
And it was a combo of financial
mistakes, operational and hugely

1042
00:56:53,320 --> 00:56:56,600
regulatory problems.
So my life was very limited at

1043
00:56:56,600 --> 00:56:57,920
that operating asset, like I
said.

1044
00:56:58,240 --> 00:57:01,560
So they had a lot riding on
those development projects and

1045
00:57:02,400 --> 00:57:04,840
they were very aware of those
problems.

1046
00:57:04,840 --> 00:57:07,160
They just thought they could
kind of handle them.

1047
00:57:08,200 --> 00:57:11,120
It was meant to be this kind of
stage transition as those assets

1048
00:57:11,120 --> 00:57:16,360
came on in 21/22/23 and took
them to 200,000 ounces in Nova

1049
00:57:16,360 --> 00:57:19,160
Scotia, but that that just
didn't happen.

1050
00:57:19,160 --> 00:57:22,800
You had huge environmental
opposition and huge regulatory

1051
00:57:22,800 --> 00:57:25,880
delays that held them back, and
then the costs blew out

1052
00:57:25,880 --> 00:57:28,760
massively.
Our calendar year 23, they were

1053
00:57:28,760 --> 00:57:32,640
meant to be producing 200,000
oz, and they did 28,000 oz.

1054
00:57:33,160 --> 00:57:35,320
So Ouch.
Yeah, it didn't.

1055
00:57:35,840 --> 00:57:38,440
It didn't kind of make the mark.
So all their fixed costs that

1056
00:57:38,440 --> 00:57:42,600
they've got at this producing
asset and clearly the minimus

1057
00:57:42,960 --> 00:57:44,120
fee.
Yeah.

1058
00:57:44,120 --> 00:57:47,480
I mean that asset went on care
and maintenance for the

1059
00:57:47,480 --> 00:57:51,480
second-half of calendar year 23.
So the last quarter of 23,

1060
00:57:51,480 --> 00:57:55,360
they're not producing anything
on this deal where about 23 as

1061
00:57:55,360 --> 00:57:57,160
well.
None of the permits had been

1062
00:57:57,160 --> 00:57:59,120
received for those development
projects.

1063
00:57:59,520 --> 00:58:03,920
So almost from the off they face
charges for not complying with

1064
00:58:04,040 --> 00:58:09,120
environmental laws that just
didn't give them a good brand.

1065
00:58:09,320 --> 00:58:11,480
You know, I'm sure they'd argue
that that wasn't true.

1066
00:58:11,480 --> 00:58:14,680
But the the perception of of
what they were doing there was

1067
00:58:15,200 --> 00:58:17,920
not backed by popular support.
And it was, you know, you need

1068
00:58:17,920 --> 00:58:20,800
your social license.
It was very tough the issues

1069
00:58:20,800 --> 00:58:22,160
that they didn't come out of the
blue.

1070
00:58:22,600 --> 00:58:24,760
The, the previous company
Atlantic had been battling with

1071
00:58:24,760 --> 00:58:28,960
these and there was this meeting
about a tailings management kind

1072
00:58:28,960 --> 00:58:31,880
of facility there.
This was after the deal was

1073
00:58:31,880 --> 00:58:35,360
announced but before it had
closed and there was this kind

1074
00:58:35,360 --> 00:58:38,240
of protest or somebody didn't
want it to go ahead kind of

1075
00:58:38,240 --> 00:58:43,400
being violently arrested as the
as the headlines rang out at the

1076
00:58:43,400 --> 00:58:44,320
time.
So.

1077
00:58:44,800 --> 00:58:47,800
My misremembering the tailings
like pumped into the ocean

1078
00:58:47,800 --> 00:58:52,800
there.
They were exploring like Tri

1079
00:58:52,800 --> 00:58:56,400
stack and every every option
that they could here.

1080
00:58:56,400 --> 00:58:58,680
I'm not specifically sure what
they were talking about in this

1081
00:58:58,680 --> 00:59:02,080
in this meeting here, but if
you've got the boss of Saint

1082
00:59:02,080 --> 00:59:04,880
Barbara saying I've got to prove
why this is a good deal.

1083
00:59:04,880 --> 00:59:07,240
So from the off they knew they
had challenges.

1084
00:59:07,240 --> 00:59:10,760
And interestingly on the the
social license, he had this

1085
00:59:10,760 --> 00:59:13,800
comment to add that sometimes a
change in owner or change of

1086
00:59:13,800 --> 00:59:16,800
management can improve projects
social license to operate.

1087
00:59:17,160 --> 00:59:19,760
So they thought that maybe them
being a different entity would

1088
00:59:19,760 --> 00:59:23,640
help the cause, which didn't
turn out to be true in the end.

1089
00:59:23,960 --> 00:59:27,200
Imagine a Canadian saying that.
I'd come in here, you know, it's

1090
00:59:27,240 --> 00:59:30,600
like, right?
Wouldn't smell good, would it?

1091
00:59:31,760 --> 00:59:35,160
So within six months, one of the
development projects, Cochrane

1092
00:59:35,160 --> 00:59:40,520
Hill, saw it included in a
designated wilderness area.

1093
00:59:40,960 --> 00:59:42,760
That is never good for something
you want to find.

1094
00:59:43,280 --> 00:59:46,640
Then you've got the financial
strain and it's kind of why I

1095
00:59:46,640 --> 00:59:49,920
ranked this deal so highly
because it was too big a deal

1096
00:59:49,920 --> 00:59:53,280
for the company to not go, well,
you can't do that big a deal

1097
00:59:53,440 --> 00:59:58,280
relative to your size and it
just go disastrously wrong,

1098
00:59:58,280 --> 01:00:01,240
right.
So from pre deal to post, St.

1099
01:00:01,240 --> 01:00:04,880
Barbara went from debt free to
nearly at with nearly $400

1100
01:00:04,880 --> 01:00:07,760
million cash to essentially
neutral.

1101
01:00:07,760 --> 01:00:12,000
So they're positive sort of
balance sheet strength is

1102
01:00:12,000 --> 01:00:14,000
completely gone when they sign
up for this deal.

1103
01:00:15,720 --> 01:00:18,800
There was already production and
cash flow at the assets in

1104
01:00:18,800 --> 01:00:21,320
Canada and that was meant to
increase, but that didn't

1105
01:00:21,320 --> 01:00:24,320
happen.
And they were signing up for

1106
01:00:24,360 --> 01:00:26,600
heavy CapEx.
So they go to neutral balance

1107
01:00:26,600 --> 01:00:28,800
sheet, right?
But you've got 3 development

1108
01:00:28,800 --> 01:00:30,880
projects that want to come
online, you need to spend a lot

1109
01:00:30,880 --> 01:00:33,800
of money and they didn't have to
spend as much as they thought

1110
01:00:33,800 --> 01:00:36,240
because the projects didn't get
the permits, but they were

1111
01:00:36,240 --> 01:00:38,440
signing up for a lot of spending
and from the off, they were

1112
01:00:38,440 --> 01:00:41,280
putting themselves in a kind of
difficult position.

1113
01:00:41,680 --> 01:00:47,320
So you know like you've got this
asset that runs for about four

1114
01:00:47,320 --> 01:00:50,120
years from operation that's
never going to pay itself off

1115
01:00:50,120 --> 01:00:54,520
especially when your growth
ambitions at 2 1/2 X that so.

1116
01:00:54,520 --> 01:00:56,640
Presumably they're bleeding cash
while this thing's operating

1117
01:00:56,640 --> 01:00:58,920
too, because it's they're just
not getting the answers required

1118
01:00:58,920 --> 01:00:59,840
to.
Yeah.

1119
01:00:59,840 --> 01:01:03,800
I mean to put the boot in Gualia
just goes from bad to worse

1120
01:01:03,800 --> 01:01:06,760
during this time frame.
So that production downgrade

1121
01:01:06,760 --> 01:01:09,840
during the deal was a Gualia 1.
And then the same thing happens

1122
01:01:09,840 --> 01:01:12,560
quarter after quarter after
quarter for a while to come.

1123
01:01:12,560 --> 01:01:17,720
So that went from producing cash
and helping them out massively

1124
01:01:18,080 --> 01:01:22,920
to being a a very big burden.
And then again, Simbiri has its

1125
01:01:22,960 --> 01:01:26,080
own downgrades and they're
running out of those, you know,

1126
01:01:26,080 --> 01:01:29,200
that oxide zone that they're,
they're mining, they're focusing

1127
01:01:29,240 --> 01:01:33,240
or looking to focus on the
sulfides that needs CapEx and

1128
01:01:33,240 --> 01:01:35,000
everything.
And you know, in the face of

1129
01:01:35,000 --> 01:01:37,720
gold just tearing higher, that
couldn't even help them.

1130
01:01:37,720 --> 01:01:40,440
There was there was so many
things going wrong at the at the

1131
01:01:40,440 --> 01:01:44,520
wrong time for this company.
Jesus Christ, so he has.

1132
01:01:46,560 --> 01:01:49,440
This is when the Saint Barbara
we sort of finished on

1133
01:01:49,720 --> 01:01:52,040
commenced, wasn't it?
It is, yeah.

1134
01:01:52,040 --> 01:01:55,240
It's, it's kind of sad to say,
at the state of the company now.

1135
01:01:55,240 --> 01:01:57,480
Yeah, right.
It went so, so disastrously

1136
01:01:57,480 --> 01:02:00,920
wrong in this case.
Reflecting on the deal years

1137
01:02:00,920 --> 01:02:05,120
later, the chair actually said
that it wasn't the DD that went

1138
01:02:05,120 --> 01:02:06,480
wrong.
Just kind of what my first

1139
01:02:06,480 --> 01:02:08,600
thoughts were.
But he sort of pointed to COVID

1140
01:02:08,600 --> 01:02:11,960
being a, a massive impact to
saying we couldn't get our boots

1141
01:02:11,960 --> 01:02:15,280
on the ground there.
You know, take that as you kind

1142
01:02:15,280 --> 01:02:19,640
of as you kind of may, you know,
can I think COVID would have

1143
01:02:19,640 --> 01:02:22,360
been a bit of a disruption, but
clearly it was a lot of things

1144
01:02:22,360 --> 01:02:24,160
that didn't go wrong in this
case.

1145
01:02:24,160 --> 01:02:26,760
And obviously speaking with the
regulatory groups, with the

1146
01:02:26,760 --> 01:02:29,440
First Nation groups, who was one
of them, but there were plenty

1147
01:02:29,440 --> 01:02:31,480
of other things that needed to
be done kind of better in this

1148
01:02:31,840 --> 01:02:34,680
this case.
This company was an ASX 200

1149
01:02:34,680 --> 01:02:39,640
constituent when the deal was
announced, trading at 3 bucks 2

1150
01:02:39,640 --> 01:02:42,960
billion plus market cap.
Still in 2020, they're at those

1151
01:02:42,960 --> 01:02:45,360
sort of highs.
And then slowly everything

1152
01:02:45,360 --> 01:02:46,840
starts to catch up with the
company.

1153
01:02:46,840 --> 01:02:51,640
In 21, they start writing down
the assets by 23, over $700

1154
01:02:51,640 --> 01:02:55,520
million in in write downs.
The asset itself is in care and

1155
01:02:55,520 --> 01:02:58,040
maintenance.
Nothing continues to drain money

1156
01:02:58,120 --> 01:03:00,080
while it's in care and
maintenance.

1157
01:03:00,880 --> 01:03:03,360
In the years up to 2019, like
you kind of spoke to there

1158
01:03:03,360 --> 01:03:07,160
Maddie, they had done a
beautiful job like 2014 to 2019

1159
01:03:07,800 --> 01:03:10,760
was like a a beautiful day
leveraging of the business.

1160
01:03:11,080 --> 01:03:12,440
They went from strength to
strength.

1161
01:03:12,680 --> 01:03:15,960
You sort of zoom out and see it
and that they were even paying

1162
01:03:15,960 --> 01:03:17,800
dividends, right?
Like things were going

1163
01:03:17,800 --> 01:03:22,680
gangbusters and then this deal
led to it all really unwinding

1164
01:03:22,680 --> 01:03:27,760
in conjunction with Gualia
becoming the kind of asset it is

1165
01:03:27,760 --> 01:03:30,920
kind of today, right?
And Simbiri challenges too.

1166
01:03:31,000 --> 01:03:36,800
So mid 2022, they've still got a
$1 billion market cap, but they

1167
01:03:36,800 --> 01:03:40,160
don't have any defense like
Genesis, which was for a long

1168
01:03:40,160 --> 01:03:43,400
time a way smaller company, is
just circling them.

1169
01:03:43,400 --> 01:03:46,160
And because they're bleeding on
all fronts, they've got no way

1170
01:03:46,160 --> 01:03:49,240
of defending themselves.
And I think everyone knows the

1171
01:03:49,280 --> 01:03:51,400
the kind of history on, on what
happens there.

1172
01:03:51,400 --> 01:03:55,400
So not completely fair to
compare share price now and then

1173
01:03:55,400 --> 01:03:58,520
because you've got that
distribution of 205,000,000

1174
01:03:59,120 --> 01:04:03,240
Genesis shares that took place.
But yeah, a lot of things went

1175
01:04:03,240 --> 01:04:05,680
wrong.
Again, the CEO left five months

1176
01:04:05,680 --> 01:04:08,560
after this deal and that was the
CEO that had taken them through

1177
01:04:08,560 --> 01:04:13,560
that awesome period like that.
It was for unrelated reasons.

1178
01:04:13,560 --> 01:04:16,000
And I'm not sure what he could
sort of see into the Atlantic

1179
01:04:16,000 --> 01:04:20,120
deal five months later.
But yeah, that left the board

1180
01:04:20,600 --> 01:04:24,240
where not a single member had
more than $300,000 in stock.

1181
01:04:24,240 --> 01:04:28,680
Yeah, well, at that time.
So, you know, when you when you

1182
01:04:28,680 --> 01:04:33,120
think about incentives like we
we often do, it's, it's a tough

1183
01:04:33,120 --> 01:04:36,480
one for a company that's still a
$2 billion company under that

1184
01:04:36,920 --> 01:04:40,040
minimal relatively inside
ownership in the business.

1185
01:04:40,040 --> 01:04:44,160
So yeah, this one really stands
out, this deal to me because it

1186
01:04:44,160 --> 01:04:46,760
wasn't the commodity price that
completely cooked him, right?

1187
01:04:47,000 --> 01:04:53,080
This was this was a bad buy.
They'd possibly still just be

1188
01:04:53,080 --> 01:04:56,560
operating Gualia just like
Genesis are.

1189
01:04:56,840 --> 01:05:00,360
Like they'll know they got the
Bardock assets and everything as

1190
01:05:00,360 --> 01:05:02,880
well.
But like they they simplified

1191
01:05:02,880 --> 01:05:06,840
the business, they're producing
cash and that all body continues

1192
01:05:06,840 --> 01:05:10,080
to the Never Neverland.
Yeah, it's obviously gets more

1193
01:05:10,080 --> 01:05:13,960
difficult at depth, but they
would have, yeah, they would

1194
01:05:13,960 --> 01:05:18,000
have just not been lost all
their assets eventually or had

1195
01:05:18,000 --> 01:05:20,920
to sell all their assets.
It, it makes me think of people

1196
01:05:20,920 --> 01:05:26,440
saying expression, saying no is
like the hardest, but one of the

1197
01:05:26,440 --> 01:05:27,640
most important things you do,
right?

1198
01:05:27,840 --> 01:05:29,880
It's what you say no to that
really matters because

1199
01:05:30,280 --> 01:05:35,600
opportunity cost is enormous.
Yeah, I haven't scrolled to #1.

1200
01:05:35,600 --> 01:05:38,560
Have a guess.
Jase, I don't know.

1201
01:05:38,800 --> 01:05:43,520
Could I review Rio Tinto buys
Alcan this is.

1202
01:05:43,680 --> 01:05:46,680
Yeah, I thought that was going
to mentioned before, but I

1203
01:05:46,680 --> 01:05:48,320
didn't know if you'd mentioned
it to give it away.

1204
01:05:49,360 --> 01:05:53,680
This is perhaps undoubtedly the
most infamous deal in mining

1205
01:05:53,680 --> 01:05:56,880
history and it's the kind of
archetype of top of the cycle

1206
01:05:56,880 --> 01:06:01,600
deal making paying too much at
completely the wrong time.

1207
01:06:01,600 --> 01:06:05,000
And all these dollar sums are
going to be in U.S. dollars that

1208
01:06:05,000 --> 01:06:07,440
I mentioned here.
So factor that in.

1209
01:06:07,520 --> 01:06:10,040
They're they're big, big dollar
sums.

1210
01:06:11,120 --> 01:06:14,680
What was the context here mate?
Mate, the context is the glory

1211
01:06:14,680 --> 01:06:17,200
days.
This is early China boom in the

1212
01:06:17,200 --> 01:06:21,480
first half of 2007.
Alcan, Canadian aluminium giant,

1213
01:06:22,040 --> 01:06:26,760
they're fending off M&A.
The coffers of companies like

1214
01:06:26,960 --> 01:06:29,640
Rio Tinto and all the other
majors are just filling up

1215
01:06:29,640 --> 01:06:31,480
because of everything going on
in China.

1216
01:06:31,480 --> 01:06:36,240
So they've got plenty of cash
coming in the door and commodity

1217
01:06:36,240 --> 01:06:39,880
prices are just higher forever,
as they, as they like to say

1218
01:06:39,880 --> 01:06:42,600
back in the day, stretch.
The chart up into the right and

1219
01:06:42,600 --> 01:06:43,760
that's how you project the
future.

1220
01:06:43,760 --> 01:06:46,080
We all know that's how you you
make decision making.

1221
01:06:46,320 --> 01:06:48,160
Absolutely.
And like you asked before Trav,

1222
01:06:48,720 --> 01:06:51,840
the the framing for this deal
was China needs three things.

1223
01:06:51,840 --> 01:06:54,360
It needs aluminium, copper and
it needs iron ore.

1224
01:06:54,360 --> 01:06:57,000
And we Rio Tinto are going to
service all those needs.

1225
01:06:57,360 --> 01:06:59,760
So that was the mindset they
came into.

1226
01:06:59,760 --> 01:07:01,600
And especially on the alley
side, they wanted to be

1227
01:07:01,600 --> 01:07:04,680
vertically integrated oxide,
alumina, aluminium.

1228
01:07:04,680 --> 01:07:07,640
I wanted to do it all.
And they weren't the only ones

1229
01:07:07,640 --> 01:07:10,800
thinking this way.
So Alcan reached all time highs

1230
01:07:10,840 --> 01:07:15,480
of 61 bucks a share in May of
2007 and then you got Alcoa that

1231
01:07:15,640 --> 01:07:20,920
come in and have a big swing 73
bucks so that the stock at Alcan

1232
01:07:20,920 --> 01:07:23,360
appealed off a little bit.
So this was a 30 bit, 30 odd

1233
01:07:23,360 --> 01:07:24,840
percent premium when they came
in.

1234
01:07:25,320 --> 01:07:26,960
Well, Alcoa bidding cash or a
script?

1235
01:07:28,080 --> 01:07:29,160
Couldn't tell you off the top of
my head.

1236
01:07:30,120 --> 01:07:36,280
Needless to say a a bit of a
bidding war ensues because Alcan

1237
01:07:36,280 --> 01:07:38,480
come out looking for a what not
they want someone else to take

1238
01:07:38,480 --> 01:07:43,440
him out and valet and Rio Tinto
lockhorns and they they go to

1239
01:07:43,440 --> 01:07:45,680
war over this one.
And I just want to make a side

1240
01:07:45,680 --> 01:07:46,880
note.
Some of the charts from the late

1241
01:07:46,880 --> 01:07:50,480
2000s are just fantastic.
Like I'm not sure if it's

1242
01:07:50,680 --> 01:07:53,840
Microsoft paint or just
PowerPoint back in the day, but

1243
01:07:53,840 --> 01:07:55,840
that one with Shanghai in the
background is one of my

1244
01:07:55,840 --> 01:07:58,000
favourites.
The. 3D charts, yeah.

1245
01:07:58,000 --> 01:08:01,280
Oh mate, sick right?
Bring them back.

1246
01:08:01,320 --> 01:08:05,880
Yeah.
So the deal itself in July of

1247
01:08:05,880 --> 01:08:13,000
2007, Rio make a cash offer of
US $101.00 a share that values

1248
01:08:13,040 --> 01:08:19,880
Alcan's equity at US $38.1
billion and this would create

1249
01:08:19,880 --> 01:08:25,319
Rio Tinto Alcan.
This was over a 65% premium to

1250
01:08:25,359 --> 01:08:28,200
Alcan's all time high two months
earlier.

1251
01:08:28,680 --> 01:08:29,840
So.
Understood.

1252
01:08:29,840 --> 01:08:35,800
Price, Yeah.
Yes, yeah, CVRD, which is Valet

1253
01:08:36,399 --> 01:08:40,960
and Rio had kind of got in the
room together and Rio ended up

1254
01:08:40,960 --> 01:08:43,279
in, you know, very kind of
sarcastic quotation marks

1255
01:08:43,279 --> 01:08:46,920
winning out in this one and
getting the right to buy Alcan.

1256
01:08:47,439 --> 01:08:50,560
It gets bigger.
That $38 billion was the equity

1257
01:08:50,560 --> 01:08:54,200
value.
They assumed nearly $6 billion

1258
01:08:54,600 --> 01:08:57,240
US in net debt that Alcan had on
the.

1259
01:08:58,080 --> 01:09:03,160
Ouch. 44 billion US dual levy.
Yeah.

1260
01:09:03,160 --> 01:09:06,680
So they're talking up synergies
of 600 million a year.

1261
01:09:06,680 --> 01:09:10,000
They actually raised this within
a few months and they say we can

1262
01:09:10,000 --> 01:09:14,240
actually do US 1.1 billion in
synergies if you you want to put

1263
01:09:14,240 --> 01:09:17,560
any weight to that.
But here's the real kicker.

1264
01:09:17,720 --> 01:09:20,439
The deal is going to be financed
through newly committed bank

1265
01:09:20,439 --> 01:09:22,600
debt.
They put their buyback on hold

1266
01:09:22,600 --> 01:09:26,000
and they sign up AUS $40 billion
acquisition facility.

1267
01:09:26,600 --> 01:09:29,960
Oh my God.
This takes them to a just about

1268
01:09:29,960 --> 01:09:33,880
AUS $46 billion net debt
position.

1269
01:09:34,760 --> 01:09:35,840
I cannot wrap my head around
those.

1270
01:09:35,840 --> 01:09:37,399
You can't.
You can't get access to that

1271
01:09:37,399 --> 01:09:40,319
kind of like debt these days.
Bring it back.

1272
01:09:40,319 --> 01:09:42,080
Yeah, like that.
Like it was just a different

1273
01:09:42,080 --> 01:09:45,960
time where everyone wanted to
give you debt for deals.

1274
01:09:45,960 --> 01:09:48,439
That's so good that credit
crunch soon came.

1275
01:09:49,000 --> 01:09:50,840
Yeah.
So Rio straightaway want to sell

1276
01:09:50,840 --> 01:09:54,240
out this packaging business, but
that doesn't happen because

1277
01:09:54,240 --> 01:09:57,080
things go South very quickly.
They wanted to sell that for

1278
01:09:57,080 --> 01:10:00,360
over $5 billion, but they only
get $2 billion for it a couple

1279
01:10:00,360 --> 01:10:03,800
years later.
The deal would make Rio Tinto

1280
01:10:03,800 --> 01:10:07,600
the top player in aluminium and
bauxite and a sort of pathway to

1281
01:10:07,600 --> 01:10:12,560
being the top player in Lumina.
Just to like, I need to speak

1282
01:10:12,560 --> 01:10:14,440
about that net deposition once
more.

1283
01:10:14,440 --> 01:10:19,600
It goes from like a couple
billion to 46 billion.

1284
01:10:20,240 --> 01:10:23,920
Like this completely changed the
health of the business.

1285
01:10:24,360 --> 01:10:28,560
And yeah, I'll get to how they
frame it in, in a moment, but

1286
01:10:29,320 --> 01:10:31,920
just stuff goes wrong from the
beginning here.

1287
01:10:31,920 --> 01:10:35,440
So like you said, credit was
freely available and then it and

1288
01:10:35,440 --> 01:10:39,240
then it wasn't and it the door
just slammed shut.

1289
01:10:39,240 --> 01:10:41,840
Like this was done in 2007 when
you could get stuff like that

1290
01:10:41,840 --> 01:10:44,080
done.
And Alcan wasn't even a hugely

1291
01:10:44,080 --> 01:10:46,560
profitable business.
Like it's top line earnings were

1292
01:10:46,560 --> 01:10:49,720
pretty comparable with Rio
Tinto, but it didn't have Wai

1293
01:10:49,720 --> 01:10:52,560
and all.
So it's actual profit was, you

1294
01:10:52,560 --> 01:10:57,080
know, 1/5 of what Rios was.
So the fact that they would sign

1295
01:10:57,080 --> 01:10:59,280
up this much debt is mind
blowing.

1296
01:10:59,280 --> 01:11:03,360
Like the profit of Alcan could
barely even meet the interest

1297
01:11:03,360 --> 01:11:05,680
expense they were going to pay
on the deal.

1298
01:11:06,680 --> 01:11:07,880
At the time they signed the
deal.

1299
01:11:07,880 --> 01:11:11,760
Yeah, wow.
It completely, completely mind

1300
01:11:11,760 --> 01:11:14,440
blowing.
See, you must have been, you

1301
01:11:14,440 --> 01:11:18,800
must have been forecasting a
bunch of, yeah, pretty absurd

1302
01:11:18,800 --> 01:11:21,440
assumptions on on Ali Price to
substantiate this.

1303
01:11:21,440 --> 01:11:22,280
Yeah.
So.

1304
01:11:23,160 --> 01:11:29,800
They talk about pro forma 2.8
times net debt to EBITDA, but

1305
01:11:29,800 --> 01:11:33,400
then the price of the commodity
just falls through the floor and

1306
01:11:33,400 --> 01:11:36,400
that ratio kind of blows out.
And they, they frame it well

1307
01:11:36,400 --> 01:11:39,520
because that was the one
covenant that they had.

1308
01:11:39,520 --> 01:11:43,240
It was a net debt to EBITDA
multiple.

1309
01:11:43,240 --> 01:11:46,840
But it, it really, really starts
to, to hurt them.

1310
01:11:46,840 --> 01:11:51,960
And the company came out and
sort of in August 2007 and like

1311
01:11:51,960 --> 01:11:54,360
boasted about their ability to,
to raise debt.

1312
01:11:54,800 --> 01:11:58,320
That just as a bit of a side
note, as a, as a red flag.

1313
01:11:58,320 --> 01:12:02,960
I think to, to keep in mind,
like, you know, people will give

1314
01:12:02,960 --> 01:12:05,560
you debt when credit markets are
open, right?

1315
01:12:05,680 --> 01:12:08,520
And it's your ability.
It's your ability to say no and

1316
01:12:08,520 --> 01:12:11,360
be strong and understand where
you are in the cycle that you

1317
01:12:11,360 --> 01:12:14,520
want to praise, not the ability
just to sign up debt because

1318
01:12:14,520 --> 01:12:17,280
people in the boom times, we'll
give it to you.

1319
01:12:17,280 --> 01:12:19,520
Oh.
My it is so easy to get 50 grand

1320
01:12:19,520 --> 01:12:21,720
to put into CFDS as a personal
loan.

1321
01:12:22,400 --> 01:12:26,720
Bring it back, Maddie.
So the consequences very soon

1322
01:12:26,720 --> 01:12:32,560
after the world turns S Rio got
the financing away and they had

1323
01:12:32,560 --> 01:12:36,320
to issue in June 2008, less than
a year after the deal, $5

1324
01:12:36,320 --> 01:12:41,160
billion in bonds and then they
just start shopping CapEx laying

1325
01:12:41,160 --> 01:12:46,000
off 14,000 people in late 2008,
divesting heaps of assets

1326
01:12:46,320 --> 01:12:51,480
through O eight, O 9 and 2010
end up netting US $11 billion

1327
01:12:51,480 --> 01:12:53,920
from these divestments.
I'm sure they're assets they,

1328
01:12:54,600 --> 01:12:57,080
yeah, wish they could have kept.
Yeah.

1329
01:12:57,080 --> 01:13:00,800
I mean, commodity markets picked
up relatively soon after, but

1330
01:13:00,960 --> 01:13:05,880
gun to your head because the
first repayments of US, about $9

1331
01:13:05,880 --> 01:13:09,920
billion was due two years after
the deal, 2009.

1332
01:13:10,720 --> 01:13:13,320
No one was interested in
refinancing them.

1333
01:13:13,920 --> 01:13:16,480
And the sole covenant like I was
speaking to before was you had

1334
01:13:16,480 --> 01:13:19,920
to stay under 4 time, 4.5 times
net debt to EBITDA.

1335
01:13:21,120 --> 01:13:23,800
So here's where it gets super,
super, super juicy, right?

1336
01:13:24,720 --> 01:13:30,240
Shortly after Rio had bid for
Alcan BHB in the biggest mining

1337
01:13:30,240 --> 01:13:34,640
deal in history came after Rio.
This was $150 billion hostile

1338
01:13:34,640 --> 01:13:38,160
takeover, nothing we'd ever seen
before in the mining industry.

1339
01:13:39,360 --> 01:13:43,360
And this was killed in due
course through 2008 by the debt

1340
01:13:43,360 --> 01:13:47,760
that Rio Tinto had taken on and
plummeting commodity prices.

1341
01:13:47,760 --> 01:13:53,240
So in November 2008, so this is
a couple of months after Lehman

1342
01:13:53,240 --> 01:13:57,040
has failed, Rio announced that
the deal with BHB has been

1343
01:13:57,040 --> 01:14:00,120
killed and Rio stock falls 40%
in a day.

1344
01:14:00,720 --> 01:14:05,400
Holy crap.
In Feb 2009 they announced a

1345
01:14:05,400 --> 01:14:09,560
joint venture and a convertible
bond deal with Chenalco who to

1346
01:14:09,560 --> 01:14:12,560
this day a big shareholders in
in Rio Tinto and they get a

1347
01:14:12,560 --> 01:14:14,840
regular mention in investor
meetings.

1348
01:14:15,400 --> 01:14:20,080
So they come in and sign this
deal to net them US $19.5

1349
01:14:20,080 --> 01:14:23,320
billion.
But it's not done.

1350
01:14:23,800 --> 01:14:27,120
Ferb did not like this deal.
So give it a few months and

1351
01:14:27,120 --> 01:14:31,680
markets start to improve.
And on June 5, 2009, Rio Tinto

1352
01:14:31,680 --> 01:14:35,320
comes out and says all on the
same day that deal is off with

1353
01:14:35,320 --> 01:14:39,000
Chenalco.
We are now pursuing A-15 US

1354
01:14:39,000 --> 01:14:44,160
billion dollar rights issue.
Rio Tinto, this is after a 65%

1355
01:14:44,160 --> 01:14:49,200
drop in its stock and we're
going to team up with BHB in WA

1356
01:14:49,480 --> 01:14:53,000
iron ore and create this joint
venture that's going to have an

1357
01:14:53,000 --> 01:14:55,400
NPV on the synergies of US 10
billion.

1358
01:14:55,400 --> 01:14:59,480
Dollars.
Wow, OK competition though mate.

1359
01:15:00,000 --> 01:15:02,040
Yeah.
So very unfortunately, the

1360
01:15:02,040 --> 01:15:03,960
regulator didn't like this one
either.

1361
01:15:04,160 --> 01:15:07,120
And that deal, not the rights
issue, the rights issue gets

1362
01:15:07,120 --> 01:15:10,000
away, that gets done, sort of
fixes the balance sheet to an

1363
01:15:10,000 --> 01:15:14,880
extent at Rio, But October 2010
takes a long time for that deal

1364
01:15:14,880 --> 01:15:19,800
to kind of fall over with BHB.
So what could have been?

1365
01:15:19,840 --> 01:15:22,280
So they, they, they did
enormously dilute existing

1366
01:15:22,280 --> 01:15:25,840
shareholders to, to pay out this
debt to the tune of 15 odd

1367
01:15:25,960 --> 01:15:28,160
billion dollars at a depressed
share price.

1368
01:15:29,160 --> 01:15:29,560
Yep.
Ouch.

1369
01:15:29,920 --> 01:15:32,320
Yeah.
And I remember when we talked to

1370
01:15:33,760 --> 01:15:36,680
to Alan Clark, he raised the
potential that, you know, maybe

1371
01:15:36,680 --> 01:15:40,600
the reason Rio paid so much and
in cash and debt funded was

1372
01:15:40,600 --> 01:15:44,280
actually a bit of a poison pill
to prevent being gubbled up by

1373
01:15:44,280 --> 01:15:46,880
BHP themselves.
Yeah, poison pill's a funny

1374
01:15:46,880 --> 01:15:47,800
word, right?
Like, yeah.

1375
01:15:47,960 --> 01:15:50,960
It's like I'm going to, I'm
going to encumbent my business.

1376
01:15:52,200 --> 01:15:54,080
I'm going to kill myself so they
don't date me.

1377
01:15:54,120 --> 01:15:55,880
But maybe I, Yeah.
Yeah.

1378
01:15:56,480 --> 01:15:59,560
Yeah.
Well, is there any more on that

1379
01:15:59,560 --> 01:16:00,720
one, JD or?
Yeah.

1380
01:16:00,720 --> 01:16:03,280
Yeah, I mean a couple of bits
of, you know, in the.

1381
01:16:03,280 --> 01:16:06,040
Since it's #1.
In the in the aftermath have

1382
01:16:06,040 --> 01:16:12,000
taken on all that debt, you
know, the Alcan business itself

1383
01:16:12,000 --> 01:16:15,040
just just didn't do well.
Like there were massive write

1384
01:16:15,040 --> 01:16:19,800
downs, you know, as you'd expect
about 25 billion US in in the

1385
01:16:19,800 --> 01:16:23,880
write downs is the rough number
that you can sort of read into

1386
01:16:23,880 --> 01:16:30,360
on a $38 billion deal then.
And of course the the CEO leaves

1387
01:16:30,360 --> 01:16:33,880
in in 2013.
That was the same announcement

1388
01:16:33,880 --> 01:16:36,800
with these write downs that the
Riversdale write downs happened.

1389
01:16:36,960 --> 01:16:40,640
So all came out on a day that
they announced, I think I want

1390
01:16:40,640 --> 01:16:42,520
to say $14 billion in write
downs.

1391
01:16:42,880 --> 01:16:46,800
So it was a bad day.
Rio went from a market cap of

1392
01:16:46,800 --> 01:16:51,560
about Aussie 150 billion at the
end of two 2007 down to 40

1393
01:16:51,560 --> 01:16:55,440
billion at the end of 2008.
So there there moves you don't

1394
01:16:55,440 --> 01:17:00,120
kind of see every day and yeah,
just that net debt.

1395
01:17:00,120 --> 01:17:03,720
I think that's the the lesson to
kind of hit home and how you

1396
01:17:03,880 --> 01:17:05,560
sort of think about managing
that.

1397
01:17:05,560 --> 01:17:08,320
I mean it was relatively short
dated debt as well.

1398
01:17:08,320 --> 01:17:13,440
Like I said, 1/4 of it had to be
repaid or refinanced within two

1399
01:17:13,440 --> 01:17:17,200
years.
So I mean they did that at a

1400
01:17:17,200 --> 01:17:20,880
time when aluminium had just hit
a 20 year high in price and they

1401
01:17:20,880 --> 01:17:24,600
never foresaw China entering the
aluminium market the way they

1402
01:17:24,600 --> 01:17:26,600
did the.
China.

1403
01:17:26,600 --> 01:17:29,520
China went massive there.
Yeah, absolutely massive.

1404
01:17:29,640 --> 01:17:32,280
Yeah.
The opportunity cost of that

1405
01:17:32,280 --> 01:17:37,920
deal is kind of like it's, it's
very, very big to say the first.

1406
01:17:37,920 --> 01:17:41,320
God, what a time for when was
the I don't know if this was

1407
01:17:41,320 --> 01:17:43,120
around the sun.
Do I remember the stern who

1408
01:17:43,120 --> 01:17:46,280
thing for Rayo?
That's was it.

1409
01:17:46,280 --> 01:17:48,480
The bloody?
That was Rayo, wasn't it?

1410
01:17:48,800 --> 01:17:50,560
I'm not sure what that one was.
There was.

1411
01:17:50,680 --> 01:17:55,280
It was like a there were spying
or something.

1412
01:17:55,400 --> 01:17:59,240
China spy with Rio Tinto I.
Don't know my alley.

1413
01:17:59,600 --> 01:18:01,960
Don't know if it was around the
actual same time, it just

1414
01:18:01,960 --> 01:18:05,080
sounded like a horrible friggin
time for Rio.

1415
01:18:05,080 --> 01:18:08,920
Yeah, Also in that China bit,
there was a lot of very

1416
01:18:08,920 --> 01:18:13,720
uncomplimentary articles about
Rio Tinto written in China.

1417
01:18:14,360 --> 01:18:19,840
When they gave Chinako the flick
on on that June day in 2009,

1418
01:18:19,840 --> 01:18:21,400
there was some funny articles.
Yeah.

1419
01:18:21,400 --> 01:18:28,920
Well, this is It was 2009.
He was a Rio executive pleading

1420
01:18:28,920 --> 01:18:31,960
guilty to stealing commercial
secrets and receiving bribes.

1421
01:18:33,320 --> 01:18:36,920
That was all around the size.
Not a good, not a good period

1422
01:18:36,920 --> 01:18:39,840
for Rio.
But you know tough times make

1423
01:18:39,840 --> 01:18:43,880
you tougher, right?
Eddie, so sensational.

1424
01:18:43,880 --> 01:18:47,560
JD, take a breath.
Need one.

1425
01:18:48,480 --> 01:18:52,000
What are any What's the honor?
What would you say, the honor

1426
01:18:52,000 --> 01:18:54,240
board or the?
Special mentions or something

1427
01:18:54,240 --> 01:18:57,000
like that or mentions.
Oh, there's a couple nickel

1428
01:18:57,000 --> 01:18:59,760
deals that were done in recent
times that are probably worthy

1429
01:18:59,760 --> 01:19:01,840
of a mention.
I think there's there's a few

1430
01:19:01,840 --> 01:19:04,320
that the ones that really.
Jubilee would have been up

1431
01:19:04,320 --> 01:19:05,240
there, wouldn't it?
Yeah.

1432
01:19:05,240 --> 01:19:08,520
So the ones that really caught
my interest were international

1433
01:19:08,520 --> 01:19:12,520
deals.
So that Jubilee obviously with

1434
01:19:12,520 --> 01:19:16,320
Extrada coming in, there was a
few other really interesting

1435
01:19:16,320 --> 01:19:21,080
ones, the gold ones at the time
blanking on some of the names,

1436
01:19:21,080 --> 01:19:23,280
but there was are.
There were scenarios.

1437
01:19:23,760 --> 01:19:25,520
Yeah, they are, they are the
nickel ones.

1438
01:19:25,640 --> 01:19:29,880
Yeah, absolutely.
There's, there's more than a few

1439
01:19:29,880 --> 01:19:34,040
out there that are worthy of a
mention, but I think we can

1440
01:19:34,040 --> 01:19:35,840
leave it at 5.
I think there's a lot of lessons

1441
01:19:35,840 --> 01:19:38,200
to sort of sink in from, from
those ones that the ones I'm

1442
01:19:38,200 --> 01:19:42,440
kind of thinking of front and
center, Maddie, is like just how

1443
01:19:42,440 --> 01:19:44,320
quickly commodity markets can
change.

1444
01:19:44,720 --> 01:19:48,480
They can change so much quicker
than you can possibly imagine.

1445
01:19:48,480 --> 01:19:53,560
And added to that, like the, the
power of allocating your capital

1446
01:19:53,560 --> 01:19:57,080
when you have a best in class
asset is is super important.

1447
01:19:57,240 --> 01:19:59,800
That ties in with what I said
about saying no to deals because

1448
01:19:59,880 --> 01:20:01,240
that's what Rio Tinto had,
right?

1449
01:20:01,240 --> 01:20:05,720
And you see so many shiny things
flying by that the power of

1450
01:20:05,720 --> 01:20:08,840
saying no and holding on is, is
super, super important.

1451
01:20:08,840 --> 01:20:12,720
And Trev, you mentioned this
earlier, but looking at the

1452
01:20:12,720 --> 01:20:15,960
percentage ownerships of
management on the buying side

1453
01:20:15,960 --> 01:20:18,640
versus the selling side is a
very interesting one.

1454
01:20:19,280 --> 01:20:23,800
So often the sellers, Needless
to say, had big stakes and they

1455
01:20:23,800 --> 01:20:25,280
thought it was the right time to
say goodbye.

1456
01:20:25,960 --> 01:20:28,080
And these were kind of
professional management teams on

1457
01:20:28,080 --> 01:20:29,960
the buying side, so.
Yeah.

1458
01:20:30,160 --> 01:20:32,600
Who plays a role?
Whose incentive structure might

1459
01:20:33,160 --> 01:20:36,880
be bigger is more, Yeah, at
times, yeah.

1460
01:20:36,880 --> 01:20:39,440
What other takeaways are there?
I mean, I've noticed a couple of

1461
01:20:39,440 --> 01:20:46,400
themes in in these top five,
including the punitive cost of

1462
01:20:46,760 --> 01:20:50,320
debt when you get the cycle
wrong and the the deal wrong.

1463
01:20:50,480 --> 01:20:53,560
Yeah, 100%.
Like debt can be a killer and

1464
01:20:53,560 --> 01:20:56,640
it's always, always
underestimated.

1465
01:20:56,640 --> 01:21:00,560
Like just yeah, just listen to
Warren Buffett and Charlie

1466
01:21:00,560 --> 01:21:01,760
Munger and how they speak about
it.

1467
01:21:01,880 --> 01:21:05,000
You want more justice than I.
It's those one in 100 year

1468
01:21:05,000 --> 01:21:06,960
events that you're trying to
avoid.

1469
01:21:07,240 --> 01:21:10,920
But to to think your downside is
limited to to what you're paying

1470
01:21:11,320 --> 01:21:14,200
is wrong.
The downside is can be way more

1471
01:21:14,200 --> 01:21:17,720
than just the price tag like
whether that you know, firstly

1472
01:21:17,720 --> 01:21:20,360
opportunity cost first and
foremost, but then also the debt

1473
01:21:20,360 --> 01:21:23,280
you're taking on and all these
other things that the

1474
01:21:23,280 --> 01:21:27,440
liabilities in some of these
cases it, it is not limited to

1475
01:21:27,440 --> 01:21:29,760
what you're spending.
And sometimes you think, Oh

1476
01:21:29,760 --> 01:21:32,240
well, it's, you know, my market
cap today.

1477
01:21:32,240 --> 01:21:36,080
I, I can easily raise that
amount in equity if I needed to,

1478
01:21:36,080 --> 01:21:38,520
to, to fund the repayment of
that debt if it all goes

1479
01:21:39,000 --> 01:21:40,520
haywire.
But you don't think that share

1480
01:21:40,520 --> 01:21:42,640
price is going to be 80% lower
as a result as well.

1481
01:21:42,640 --> 01:21:45,920
So your dilution is horrible.
Yeah.

1482
01:21:45,920 --> 01:21:47,160
It's not there when you kind of
need it.

1483
01:21:47,360 --> 01:21:51,680
And yeah, that's just like
really, really, really do your

1484
01:21:51,680 --> 01:21:56,640
DD and listen to to every
technical financial person you

1485
01:21:56,640 --> 01:22:00,840
possibly can because you can end
up paying a a big price.

1486
01:22:00,920 --> 01:22:05,240
Another theme I noticed was a, a
propensity to seek growth

1487
01:22:06,240 --> 01:22:10,600
internationally where maybe your
like core expertise might not be

1488
01:22:10,600 --> 01:22:15,040
or this like, yeah, I call it a
dubious rationale to do a deal

1489
01:22:15,040 --> 01:22:18,440
is diversification of of
earnings into a bit of a

1490
01:22:18,440 --> 01:22:20,240
different commodity or a
different jurisdiction.

1491
01:22:20,240 --> 01:22:23,080
But that in mining, like there's
no synergies there.

1492
01:22:23,360 --> 01:22:25,920
Yeah, it looks like they all
went into unfamiliar

1493
01:22:25,920 --> 01:22:28,960
jurisdictions to themselves.
Yeah, most of them.

1494
01:22:29,320 --> 01:22:32,080
And just capturing more upside
because the commodity price is

1495
01:22:32,080 --> 01:22:35,000
rising, it's not not a good
enough right now.

1496
01:22:35,560 --> 01:22:37,280
It's like Nah, that doesn't
work.

1497
01:22:38,040 --> 01:22:40,160
I should probably add in that
I'm sure I've got details wrong

1498
01:22:40,160 --> 01:22:42,400
in here, so feel free to to get
in touch.

1499
01:22:42,440 --> 01:22:44,200
Money miners keen to keen to
hear.

1500
01:22:44,200 --> 01:22:47,040
I'm sure there's other people
with vastly more experience than

1501
01:22:47,040 --> 01:22:50,160
I who know of other super
interesting deals out there, So

1502
01:22:50,160 --> 01:22:52,440
very, very keen to hear those
ones too.

1503
01:22:52,440 --> 01:22:53,800
But.
Let us know the deals that you

1504
01:22:53,800 --> 01:22:55,720
think of when you think of value
distraction, yeah.

1505
01:22:56,000 --> 01:22:58,400
Be good to do like a.
You could do a smaller end one

1506
01:22:59,000 --> 01:23:03,480
like you know, smaller deals
that ruin small to medium

1507
01:23:03,480 --> 01:23:05,920
companies as well.
Yeah, I think projects would be

1508
01:23:05,920 --> 01:23:07,240
interesting as well.
There'll be a lot of like

1509
01:23:07,480 --> 01:23:11,800
technical learnings on that
side, so maybe someone more well

1510
01:23:11,800 --> 01:23:13,200
versed in that field would be
interesting.

1511
01:23:13,200 --> 01:23:16,360
And of course, the five best
deals would be an interesting

1512
01:23:16,360 --> 01:23:20,720
one.
They're like or the five, the

1513
01:23:21,160 --> 01:23:22,880
five.
Just a person, a lot.

1514
01:23:23,040 --> 01:23:26,840
Of sales are the five best
buyers 105 worst buys?

1515
01:23:26,840 --> 01:23:29,360
Are the five best sells?
That's it.

1516
01:23:29,560 --> 01:23:30,680
Alright, I think we should leave
it there.

1517
01:23:30,800 --> 01:23:34,360
How long did it take you to
gather or how long you been on

1518
01:23:34,360 --> 01:23:38,800
this project for Jodie?
I started last year, but there

1519
01:23:38,800 --> 01:23:40,640
was a there was a big hiatus in
between.

1520
01:23:40,640 --> 01:23:42,200
But yeah, it was just sort of
out of interest.

1521
01:23:42,200 --> 01:23:44,320
Then I thought, oh, maybe we can
turn this into an episode or

1522
01:23:44,320 --> 01:23:46,000
something.
Mate, it's like writing a book.

1523
01:23:47,760 --> 01:23:50,120
'Cause it was the longest sort
of write up since my uni days, I

1524
01:23:50,120 --> 01:23:52,280
reckon.
Yeah, it's good fun.

1525
01:23:52,400 --> 01:23:54,440
It's very interesting.
Right now we better thank all

1526
01:23:54,440 --> 01:23:55,880
the partners.
I don't know if I'm in a

1527
01:23:55,880 --> 01:23:58,480
different shirt or something
'cause this may be recorded

1528
01:23:58,520 --> 01:24:04,200
later, but if I am, whatever.
Say discounted tickets going out

1529
01:24:04,200 --> 01:24:06,720
the bloody door everywhere.
Oz IMM underground operators

1530
01:24:06,720 --> 01:24:09,960
conference conference 100 bucks
off but you got discounts on the

1531
01:24:09,960 --> 01:24:12,720
GRX conference in Brizzy in May
buddy.

1532
01:24:12,920 --> 01:24:16,000
Oh, but it's just all happening.
And our great partners at

1533
01:24:16,000 --> 01:24:18,640
Mineral Mining Services,
Grounded, Sandy Ground Sport,

1534
01:24:18,960 --> 01:24:23,680
CRO Insurance, K Drill, WA Water
Balls, Swig, Quattro, Project

1535
01:24:23,680 --> 01:24:27,320
Engineering, Cross Boundary
Energy, JD Sensational.

1536
01:24:28,160 --> 01:24:29,040
Thanks mate.
Hurduru.

1537
01:24:29,040 --> 01:24:30,000
Money miners.
Hurduru.

1538
01:24:30,880 --> 01:24:33,520
Information contained in this
episode of Money of Mine is of

1539
01:24:33,520 --> 01:24:35,600
general nature only and does not
take into account the

1540
01:24:35,600 --> 01:24:39,200
objectives, financial situation
or needs of any particular

1541
01:24:39,200 --> 01:24:41,240
person.
Before making any investment

1542
01:24:41,240 --> 01:24:44,280
decision, you should consult
with your financial advisor and

1543
01:24:44,280 --> 01:24:47,440
consider how appropriate the
advice is to your objectives,

1544
01:24:47,640 --> 01:24:49,640
financial situation and needs.