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An Australian
Iron Ore Mining Company
PARKER RANGE IRON ORE PROJECT
• Major alliance with funding partner
• Partner to purchase deposit for $180M+
• Includes exploration joint venture to be
managed by Cazaly
• Feasibility studies completed, awaiting
final approvals
PILBARA IRON ORE PROJECTS
• Numerous projects located in the
Hamersley Iron Province
• JV withWinmar Resources proves up
242Mt @ 57.6% CaFe atWinmar deposit
• Scoping study for development underway
EARAHEEDY BASIN IRON ORE PROJECT
• Combined tenure withVector Resources,
50/50 JV
• Over 2,000km2 in a new, poorly explored
iron ore province
• Recent new iron ore discovery at Cecil
Rhodes prospect
www.cazalyresources.com.au
Level 2, 38 Richardson St, West Perth 6005
Tel: 08 9322 6283 Fax: 08 9322 6398
Each year mining companies will spend billions on exploration,
construction of processing facilities and improvements in
operational efficiencies, and must access various sources of
capital to fund their operational and development objectives.
Surprisingly though, for many the decision to put in place
adequate protection against the price of the commodity
they produce or plan to produce is often overlooked or only
implemented when prices have moved against them.
A major influencing factor used in the argument against
implementing a comprehensive hedging program emanates
from the conflicting views between the traditional sources
of capital used to finance mining projects, either through
equity or debt. Proponents for equity markets will argue that
shareholders are seeking exposure to the underlying metal
prices and therefore should remain unhedged, while debt
financiers are focused on certainty of cash flows and the ability
to repay debt and are therefore concerned about downside price
risk mitigation. Additionally, producers will often argue that if
their peers are not hedging and they do, they will be unduly
penalised by the equity markets and it is better to report results
that have been impacted by market price movements in line
with similar companies in their sector.
Despite this view, it is interesting to note recent data
indicates that the global hedge book for gold has started
increasing, after almost four years of producer de-hedging.
It is important to recognise that producer de-hedging has been
driven by the major producers with multiple operating mines,
often multiple commodities and considerable balance sheets,
important mitigating factors that most mid-sized producers in
Australia do not have the benefit of.
As investors become more sophisticated and as more
opportunities open up, there is a changing philosophy to gain
direct physical exposure to metals prices through Exchange
Traded Funds (ETF’s) and Contracts For Differences (CFD’s) etc.
This, when coupled with exceptional levels of volatility over the
past few years, adds weight to the argument for implementing
an adequately structured risk management framework to ensure
the long-term viability of the mining projects they invest in.
The high commodity prices we are currently enjoying
has seen many projects that were previously considered
uneconomic due to their high operating costs being developed
or re-opened. These marginal projects are highly sensitive to
falling commodity prices and as such it is vital some degree of
risk mitigation is considered.
A robust commodity price and financial risk management
framework supports the achievement of mining companies’
objectives by enabling the identification, quantification and
evaluation of risks. Through various scenario analyses, a
company board can make well informed decisions about setting
acceptable risk thresholds, identifying and mapping controls
against these risks and implementing policies and procedures
to ensure the directives handed down to management are
adhered to and executed appropriately.
It is essential to agree and articulate the overarching
risk management philosophy of the company with respect
to managing price movements. To do this a board needs to
understand exactly the risks they are facing and quantify these
so they understand the impact. Clearlymovements in commodity
prices are a major consideration; however, management also
need to be aware of and assess other factors such as accounting
risks, credit risk, basis risk and operational risks.
It is vital that in quantifying the risks they are meaningful
to a board by focusing on the impact on key metrics such as
cash flows available for debt service or enterprise value for
example. Once a board has an appreciation of the potential
impact price movements will have, they can then consider how
much tolerance to risk they are prepared to accept. If a board is
willing to accept these risks, then the policy should reflect that,
but in many cases there is a middle ground and typically there
will be agreement that some level of price protection is prudent.
Once a risk management framework is established, it is
important that the business educates itself on the various hedge
structures available, how the various markets operate and how
they will manage and monitor the performance of their hedge
book on an ongoing basis. It should be remembered that there
are hedging products available to provide protection against
falling prices that do not limit a company’s positive exposure to
appreciating commodity prices.
In conclusion, while producers of minerals are currently
enjoying the benefits of a high price environment, we know
that commodity prices are cyclical. It would be imprudent to not
take advantage of opportunities currently available to secure
the high margins currently being enjoyed by implementing
protection against adverse price movements in the future.
While many will argue that their projects can withstand
significant commodity price falls, taking out relatively small,
incremental levels of protection against falling metal prices
can provide the sort of piece of mind management should be
contemplating, while also potentially giving a company an
advantage over those competitors who failed to adequately
implement a risk management strategy should commodity
prices fall.