Cambodia's nascent mining industry faces new challenges as commodity

prices plummet and the global financial crisis puts the squeeze on

capital

Photo by:

AFP

A BHP Billiton truck is pictured at a mine in the Pilbara region of West Australia. BHP Billiton is exploring for bauxite on a 97,373-hectare conession in Cambodia’s  Mondulkiri province

ONCE seen as a future engine of economic growth, Cambodia's mining sector could be under threat as falling metal prices, tight credit and high startup costs take their toll on the budding industry.

As mining giants see profits and share prices tumble with a stalling commodities boom, non-core investments in emerging markets like Cambodia could be put on hold or scrapped.

Most under threat, say local analysts, are small and medium-sized startup operations, which form the core of the Kingdom's emerging mining sector. "In the next six months, we will be seeing a lot of mining licences for sale on the market when companies find out they don't have enough cash to go ahead," said one local business leader.

Documents obtained by the Post say that 67 companies are licensed with the Ministry of Mines and Energy to explore 95 sites in the country.

Cambodia's mineral potential is still unknown as most areas of the country have never been surveyed for resources.

The only mines in production are for marble, granite and cement, said one source.

The Ministry of Mines and Energy would not confirm the number of mining licences that have been issued, or which companies are active.

What is known is that most of Cambodia's exploration projects were planned before the commodities bust.

Mining stock prices have gone from being the best performers in the first half of 2008 to some of the worst.

The DJ Stoxx Basic Resources index is down 58 percent on the year - even worse than the banking sector.

Copper on the London Metal Exchange is down about 40 percent since hitting a record US$8,940 per tonne on July 2, and zinc has fallen to about $0.87 from more than $2.00 per pound in June. The price fall is leading the world's largest mining companies to close pits or scale back production.

Another challenge for the junior mining sector has been startup costs, which have surged with high construction material prices.  

The most notable cost overruns were BHP Billiton's $2.2 billion Ravensthorpe project in Australia and Inco's $1.45 billion Goro nickel-cobalt project in New Caledonia.

Construction costs have dropped considerably since then, but they remain high by historical standards.

Big players

But even if small and medium-sized operations are vulnerable, large companies like BHP could be largely unaffected by the current crisis, said a local expert.

"Large players are in it for the long term - they expect to put money into a project and wait for years without seeing a profit," said Bretton Sciaroni, a partner at the Sciaroni & Associates legal firm.

Among the large companies in Cambodia are BHP, which is exploring for bauxite on a 97,373-hectare concession in Mondulkiri, and Oz Minerals, which is exploring for gold.

Also active are Southern Gold, Liberty and Kenertec - which has an iron concession.

But a London-based analyst said the crisis might make big players hesitant to press ahead in emerging markets.

"Places like Cambodia won't be high on the list for large companies ... in terms of risk, large corporations are concentrating on core operations in countries like the US and Australia, which are more stable," said Ian Armstrong, divisional director at the investment firm Brewin Dolphin.  

The problem, said Armstrong, is that big players are taking a triple hit of lower metal prices, high startup costs and a tight credit market.

In the next six months, we will be seeing a lot of mining licences for sale.

"With metal prices falling, we are getting close to the threshold of when it becomes uneconomic to put many of the new greenfield projects into production," he said.

But Armstrong expects metals to begin recovering in the second half of 2009. "A lot of people are sitting on cash like cats looking to pounce, so there is a lot of opportunity," he said. He added that falling construction materials prices could also cut startup costs.

Cash cushion

Having sufficient cash on hand is one of the most important tools a company needs to withstand the financial storm ,and one of Cambodia's largest mining companies, Oz Minerals, said that it is prepared to survive a downturn.

"The traditional problem with [startup mines] is capital - and we have lots of cash," said Matthew Foran, manager of stakeholder relations at Oz Minerals in Australia.

The company says it has $1 billion in cash since a merger deal was signed earlier this year.

The main challenges to the sector, said Foran, are high oil prices and expensive import costs. "The projects have to have realistic cost projections," he said.  

Korean companies could be vulnerable to the crisis as troubles at home forces them to pull investments in Cambodia.

Korea's Kenertec, which is involved in iron in Preah Vihear, has been hit by both the crisis and scandals in Korea.  

The company ran into trouble earlier this year when it was alleged to have bribed the   head of Prime Minister Kim Yung-chul's office, who was found dead, allegedly from suicide.  

The company was not available for comment.