This article was first published in WA Mining Club‘s Minesite, an annual collection of the club’s activities as well as those of its members. Ron is an active participant of WA Mining Club and never misses an opportunity to pen a few words.
Last year WA Mining Club legend, Ron Manners, took a peek into the future posing the question: where is mining going in the west? Spectacularly forward would have to be the answer based on the 12 months since! Now, Ron turns his attention to the question that has fascinated everyone in the industry since it began. He leads off by stating his credentials for writing on this topic, which are simple but extremely relevant.
My qualifications are only that I’ve lived through so many violent market cycles that I feel myself fortunate to have survived to tell the tale. Occasionally I pull out a few old files to try and get a further understanding of some of them. Each time my wife, Jenny, spends the next few days sneezing from all the old Kalgoorlie-Boulder dust that escapes. So, after pulling these files out once more, let me give you a quick ‘tour’ of my personal experiences with such business cycles. Let me take you back to the mid-1960s…
This was a time in Australia when nobody appeared poor, but nobody seemed to have any money to spare. Everyone worked hard to feed and educate their families. That was about the time my father, Charles Manners, died. I was 30 years old and helped my mother sort out dad’s affairs. Among the bits and pieces Dad left my mother was a thick file of share scrips. We lived in Kalgoorlie (it definitely wasn’t Kalgoorlie-Boulder then, Boulder was a very separate place!) and I walked this file over to the local stockbroker’s office, run by Ron Reed (father of David Reed), to see if there was anything in it that could help my mother re-establish herself in Perth so that she could be near my sister and her family. He had a good look through the file and said: “Too bad Ron, they’re all dead.”
Why do I keep all this paper? Is it just to remind me that history is a funny thing in the way it repeats? There are two reasons:
- Wallpaper may come back into fashion and I have enough share scrip for a large room.
- Four years after taking my father’s share scrip file into the stockbroker’s office, I heard that the Hick’s family was planning to breathe life into one of the companies from dad’s ‘dead scrip’ file by recapitalizing the company and involving it in the nickel boom. The company was called Spargo NL.
Its efforts were successful and it certainly helped my mother establish herself in Perth. So the moral of the story is that ‘tears may only be temporary’.
My first experience with violent financial cycles
This was Australia’s 1960 credit squeeze. Possibly, some of you may have lived through this or heard of it. It was the first example I came across of what I call government failure and, and that’s when I started a file in which I’ve been collecting examples of how the outcome of government actions is usually the opposite of their intent (it’s become a fairly fat file).
I’ll tell you about the government intent first as then we can analyze the actual results. In November 1960, the Federal Government (Robert Menzies PM and Harold Holt, Treasurer) was confronted with statistics showing that imports were outstripping our exports and Australia was running out of foreign currency. There were no hedge funds in those days, electronically moving funds back and forth, trying to outwit the various business cycles. It was a totally regulated system in the 1960s.
The Federal Government over-reacted and promptly announced a credit squeeze that resulted in any companies with overdrafts being told by the banks to quickly reduce the amount by up to 50 per cent. To further stifle business, the then Treasurer Harold Holt announced that the interest payable on most business loans would cease to be tax deductible. A Melbourne friend of mine, David Hains, was operating a very successful chain of retail stores at the time and explained the effect on retailers:
“As most hire purchase companies were borrowing 10 or 15 times their issued capital and made profits that were small, after paying interest this of course turned profitable finance operations into very substantial loss makers. This directive created a huge reaction, with investors rushing to withdraw funds from the finance companies and finance companies immediately restricting credit to retailers.”
My own experience in Western Australia was similar. The finance companies of the day, such as Esanda and Custom Credit, with greatly restricted funds available, could place all these funds easily to selected customers from their head office. So, they promptly closed all branch offices, particularly in the country regions. This left retailers without financial facilities and, consequently, without clients.
Somewhere, I have statistics of how many thousands of firms ‘went to the wall’ as a result of this government failure. Older members may remember some of the bigger names such as Cox Brothers, Reid Murray, HG Palmer and Eric Andersons. These were all big names in Australia’s retailing of the 1950s and 60s, but there were thousands of smaller names that were forced to close their doors, resulting in mass retrenchments.
Those firms that did survive never trusted governments or finance companies again and it was quite normal for these survivors to open their own in-house finance companies. I know we had our own, called Hentry (Aust) Pty Ltd and that ran quite profitably right into the late 1970s when, under considerable pressure from the larger finance companies, the state governments’ introduced legislation licensing finance companies, imposing very high asset criteria and high license fees. This then wiped out another vital segment of an industry.
I always queried how consumers benefited from such licensing. If a finance company goes broke, it cannot adversely affect the consumers (in fact it may even be beneficial for them. That is, if the financial company vanished you may even avoid replaying your loans!). However, it was very clear who benefited and how finance and leasing rates took an impressive upward hike. That government’s misguided policy petition of the 1960s credit squeeze was equivalent to a ‘crash’ and brought on widespread tears. I believe it set back Australia’s emerging ‘consumer society’ by up to 10 years. The really sad thing about it was the number of businesses that were completely wiped out and who didn’t have a chance to participate in the healthy recovery process.
The first nickel boom
The next experience I had with market cycles was the original nickel boom. This was the 1969 version, often called the Poseidon Bubble and lasting only 18 months. I chart that boom not just by the value of Poseidon shares. Those shares, incidentally, as told and retold again in folklore, ranged from 21/2 cents to $280 and then ultimately zero as the company slipped into liquidation. I chart it also on the number of people we employed in our mining equipment and engineering company WG Manners and Co, now Mannwest Group (still a healthy survivor after 111 years in business). There were four of us in 1966, 48 in 1970 and by the late 70s we were down to four again!
The first nickel boom was so exciting I decided to float a company called Kalmin Exploration Limited. I wouldn’t have believed anyone if they had told me it would be the last company floated in the nickel boom and that it would ultimately be transferred to the industrial board and become a homebuilder. None of the statistics of the period were reflected by smooth, gradual charts. There were 350 Australian and international companies looking for nickel in the Kalgoorlie region. Kalgoorlie had the highest concentration of geologist in the world at that time. Interestingly enough, the second highest population of geologists was in New York City.
Q: Of those 350 companies searching for nickel, how many of them actually made a profit out of mining nickel? A: Two. They were Western Mining Corporation (WMC) and Metal Exploration NL. Mostly it was tears for the other 348 companies.
Debt and leasing was almost unknown in the Goldfields prior to that nickel boom. However, so many of us rushed into new buildings and acquired additional equipment and stock to service the frantic activity that we found ourselves somewhat exposed when the tide went out. Fortunately for us, the supply and engineering cycle always lags the commodity cycle by a couple of years, so many of the unprofitable miners continued their efforts to succeed. This included CRA, Anaconda Inc of USA and Newmont.
That’s probably what saved us from some tears but it didn’t save us from the boredom of survival for the next 10 years until gold poked its head up again in 1980 (for a short while). Then 16 years after the first nickel boom, the second nickel boom gathered speed, far more orderly this time and, thankfully, it’s continuing with substance. No tears in sight, even though some companies will perform better than others. The current uranium boom might be different, but history tells us that it could produce a similar statistic to the original nickel boom, where two companies out of 350 ever became profitable. So, perhaps there are plenty of tears ahead.
Gold boom of January 1980
The next boom and crash for me was the brief golden boom that peaked in January 1980. At the time, gold had been moving up steadily from its fixed price of around US$38. It’s hard for us to imagine now, but during the years of the fixed gold price it was illegal for people to own gold. I think it was around 1972 when President Nixon opened what they called the ‘gold window’, and not many investors had actually seen gold or been involved with it – until then. Several years after this we were confronted with the oil crisis when the oil price quadrupled, resulting in a massive transfer of fund from the Western world to the oil producing countries. One of the reasons why the oil producers so dramatically increased the price of oil was that they were tired of being paid in US$ paper currency, which the US Government was printing like confetti at the time, guaranteeing an ultimate erosion of purchasing power.
As a way of diversifying and not reinvesting their surplus funds in US-denominated investments, many of the Arab nations plunged heavily into gold, sending its price skyrocketing to US$840 in January 1980. For anyone with a dormant but clean company shell this was a perfect opportunity to refinance it and join in the new gold rush. I was in London when gold was at its peak, raising funds for a small company called Coopers Creek NL. I was treated like a celebrity simply because I was associated with our gold industry at the time. It was almost as good as being a winning World Cup soccer player! However, during my time in the air on the flight home London, the gold price dropped by US$150 (off the US$840) and kept going down through until about 1982, when I think it got as low as US$280.
Not many tears that time as so few even got started. Looking back, I’m sure that mini-boom was somehow related to an almost follow-on boom in South Perth home units. It appears that anyone who made any money out of that gold burst decided to invest in countless blocks of home units being built in South Perth. My first home unit experience, in partnership with my dentist, was so successful that we sold the development even before we got around to demolishing the old houses on the blocks. I was so excited by this success that I immediately doubled my bets. Very exciting, highly leveraged finance packages were readily available and “of course all the units would be sold off” before one had to bear the full impact of the astronomical interest rates of 17-24 per cent that were ruling circa 1982. I didn’t know then and still don’t know now where all the buyers were supposed to come from, but they certainly didn’t arrive. I think my tears at that time (certainly, there would not be any now!) were blood red and I can remember the light-hearted question that was often asked during that period: “What’s the difference between a home unit in South Perth and syphilis?” The answer, of course, was: “You can always get rid of syphilis.”
My own father had always told me never borrow money to go looking for gold, or to gamble. I always followed this advice but somehow thought the South Perth units were different by being bricks and mortar. I was wrong and Custom Credit proceeded to sell one unit per month, just to pay off their interest payments. Not even reducing the principle. As I noted — there would certainly be no tears now as the Perth bricks and mortar market continues to go through the roof, with the obviously once odorous South Perth right up there with the best of the suburbs.
Whilst, as I mentioned, the 1980 gold run-up didn’t seem to come to very much at that time, it did however plant a lot of seeds in the minds of our mineral explorers who had been pretty much stranded since the end of the nickel boom. Many of these groups then began working toward putting companies together, resulting in some great performers emerging from 1982-1985. These companies included Metana Minerals, Sons of Gwalia, Pancontinental Mining, Delta Gold and Croesus Mining. There were many other companies that also participated in this run-up to the fantastic nine-month long 1987 gold boom, right up until the fever pitch and the famous…
Crash of 1987
Now that was one that was heavy on the tears because this time there was a whole new generation of punters who borrowed heavily to be part of something they didn’t understand. From memory, that major crash actually happened in London and New York, on a Friday night, October 16, 1987. Also, from memory, the London Stock Exchange closed its doors for a day (known as Black Monday). On the Friday, our Australian market was thundering away and I can remember being in the late great Bill Wyllie’s Perth office with my Mannwest co-director, Harry Kitson. We were asking Bill’s advice on whether we should accept a broker’s invitation to list our private company Mannwest Group. Bill had explained why he was not going to list his own Asia Securities private company and we parted company, without any real sense of foreboding about what was about to happen. Back in Kalgoorlie, on Monday morning in my office, I heard all the bad news about what was going on with the Australian stock market.
Fortunately for the gold producers, everything crashed except the price of gold! That didn’t collapse until the very next day, as gold-denominated assets were about the only thing left that people could actually sell to get themselves out of trouble. I clearly remember then walking down Hannan Street in Kalgoorlie, feeling somewhat numb and considerably diminished by this absolute wipeout. I bumped into my friend Geoff Stokes. Apart from owning Kalgoorlie’s Palace Hotel and being my accountant, Geoff was also a substantial mining company promoter. Goff exploded with some expletives when he saw me and finished off with this question: “Manners, do you know how much I’ve dropped since Friday? $21 million”. Well up until then I was on the verge of tears, but my situation was, by comparison, relatively insignificant. I suppose everything is relative, so that’s about all that stemmed my tears on that occasion.
The next one was the dotcom boom of 2000, when we saw many of the previously abandoned corporate shells change names and head towards the universe of the dotcoms. This boom was difficult for me to understand. However, years previously I had read a book called Extraordinary Popular Delusions and the Madness of Crowds. It was therefore easy for me to see where this was going. The tears were shed by some pretty big fish when all this fell over and by the time some of the legal cases made it to the actual courts, they were judged by people who had little memory of the hysteria that accompanied that era. I think very few winners emerged from this boom and one of the serious outcomes was that it produced a whole generation of people who vowed never ever buy a share again. Think of all the fun and adventure they would have missed out on if they did remain out of the game.
That, of course, brings us to this current surge — although it was retreating a little in August 2006 when this was written. Australia is often called the lucky country and just as we were rescued by Japan in the 1960s when their demand for iron ore and other commodities gave us some muscle, here we are this time being rescued by the Chinese. I’m encouraged, because this is the first time in my memory when such as broad range of mineral commodities are in demand. Even lead, as a metal, is sexy!
Tag this onto the very substantial property market in Western Australia and we have a very buoyant platform to underpin out efforts in whatever we choose to specialize. Perhaps it’s too soon to call this a boom, and it certainly took a breather in May June this year (2006) when the ASX Index dropped by about 12% and it’s been a trifle jumpy since. I was travelling overseas at that time and Australia got off lightly compared with some of the other countries (which dropped 15% to 20%).
When will we know if this one is a boom?
Perhaps we should refer to the Robin Widdup Clock Face Predictor (often called the JBWere Clock Face Predictor as Robin Widdup was working with JBWere at the time he developed the clock theory).
Here are two things that might minimize future tears:
If you work with several stockbrokers, try running you own in-house Broker of the Year competition. This can be most revealing on the true value and quality of their advice.
Ensure that your own loved ones, ie. wives and children, understand how to handle money and preserve capital and benefit from investing.
The above is a harder task than it was some generations ago, mainly due to the pervasive popular culture on TV and in movies which tends to diminish the role of parents as head of the house. I was probably lucky to be part of a generation where we actually took more notice of our parents than is the case today. However, I’m still aware that much of the passed wisdom from my parents simply went straight over my head., because at the time it was seen to be of no consequence. I do, from time to time, remember their wise sayings and I’ve already referred to my father’s comment — don’t ever go looking for gold or go gambling with borrowed money. It is instructive to observe how other people pass on their wisdom.
One example from a friend of mine consists of a three-page list of tightly condensed — 36 points — he has titled Old Fashioned Advice to Siblings. These are short, sharp sentence items which they can easily carry with them. Another friend has written a comprehensive three-page book with a detailed index. I completed this task for him after he died of cancer, but from the observation there was far too much information for his family to absorb, so they never really appreciated its value. Remember when tackling this task that brevity will win.
In these words I hope that I’ve provided you with sufficient evidence that I’m a boom-bust addict and a perpetual tearful person (alternating between tears of joy and sorrow), but I wouldn’t have missed out on any of it. To have not participated fully would be to have never lived at all.
My total focus is to remain an active participant in as many business cycles as I can squeeze in. It is only when tears and fears, booms and busts, confront us that it brings out the very best in each of us. So long live these vigorous cycles as they will save our lives from boredom.
Article first published in Minesite 2006, 2nd edition. WA Mining Club Inc.