Source: BRW Weekly
Article Date: 14/05/2009
Experimental technology is the key to holding on to Australia’s mining dominance, yet capital support is hard to find.
Eighteen months ago, John Atkinson, the managing director of coal technology firm White Energy, was in New York, proudly recounting to an investment bank group how his company had won a $4.5 million federal government grant. He recalls the bankers were not impressed. “Surely you mean $450 million?’ they asked.
In Atkinson’s view, the scene highlighted the differing levels of support for technology-enabled mining companies in Australia and the world. Despite the nation’s reputation as a world leader in mining, local companies promoting concepts or techniques that can potentially transform the industry struggle for assistance.
“The issue is that technology-enabled natural resources companies get extraordinary support in the United States from both their capital markets and their government. Here, neither is particularly forthcoming.
White Energy is the exclusive licensee of a binderless coal briquetting process, said to increase the energy content of low-grade coal by more than 30 per cent. According to the company’s website, the process also makes the coal burn more efficiently, lowering carbon emissions.
“Ours is a practical technology,” Atkinson says. “It’s something the CSIRC developed and here we are constantly having to look for capital overseas in order to develop something that Australia should be very proud of.”
He is not alone. Peter Bond, chief executive of Linc Energy, which is pioneering underground coal gasification (UGC) and gas-to-liquids technology use to produce ultra-clean diesel fuel, has had similar experiences.
Linc was the standout S&P/ASX 200 performer last year, rising 162.5 per cent despite the worst stockmarket crash since the Great Depression. Aside from Bond, who owns 48.6 per cent of the company, its share register is predominantly made up of overseas investors.
“The overseas markets tend to be able to understand and adopt these stories earlier than the local market, and I think that’s why we’ve had reasonable support – because we deliberately focused on overseas as part of the initial marketing of the company, ” Bond says.
Both Atkinson and Bond admit the lack of local interest is partly a function of market size.
Compared with Europe and North America, Australia’s pool of capital is not deep.
“Most of the fund managers here, their mandate revolves around income-producing companies and mitigation of risk, “Atkinson says.
“Whereas in a capital market like North America, managers have deeper pockets and they get the risk-reward correlation when it comes to technology companies.”
High-profile disappointments, such as BHP Billiton’s Boodarie hot briquetted iron plant and Anaconda Nickel’s Murrin Murrin nickel laterite operation, have left a bad taste in the mouth. For every success, there have been 25 failures, ” the chief investment officer of boutique fund Atom Funds Management, David Shearwood, says.
“They can do it in a lab in a controlled environment, but when they try on a larger scale, particularly on a continuous basis, something usually goes wrong.
Shearwood, a qualified mining engineer, says an exodus of technically minded people from the funds management sector over the past two decades has not helped resources companies develop new ideas and concepts. “A lot of analysts looking at companies like Linc don’t have a technical background so when you get to that issue of ‘will the technology work or not’, it makes it harder to understand, ” he says.
The chief investment officer for Hong Kong-based clean technology investment fund Clean Resources Asia, Andy Pidden, finds it hard to believe that companies such as White and Linc do not receive more coverage from smaller Australian stockbrokers.
Research houses could “differentiate themselves by picking these future winners before they’ve produced strong cash flow, doing a research job that’s thorough enough to convince people that the prices they are trading at represent a lot of enterprise value”, he says.
Shearwood points out that while these companies may not yet have the critical mass or cash flow to meet most fund managers’ risk profiles, many have attracted support from the industry giants.
In White’s case, BHP Billiton is on its share register. In November, it entered into a joint venture with Black River Asset Management, which is a subsidiary of Cargill, the largest private company in the US.
Carbon Energy, another ASX-listed company developing UGC technology, has agreements in place with leading fertiliser producer Incitec Pivot and Dutch industrial giant LyondellBasell Industries. Lyondell is investigating developing a methanol plant in Queensland using synthetic gas produced from UCG as feedstock.
Atkinson says government support for companies such as his is not completely lacking, but could be prioritised. Rather than having many projects receive a small amount of funding each, he would prefer the top 50 be selected on the basis of their chances of commercial success.