Melting Public Money

The old adage -- beware of government's picking winner -- was brought home to many thousands of investors and taxpayers this week with the demise of the Australian Magnesium Corporation's Queensland magnesium smelter.

The AMC project was always a risky project.  It entailed a new firm building a multi-billion dollar plant based on technology which had never been tested on a commercial basis.

The key question was whether the project was viable.  Commercial experts thought not.  The project's proponents promoted the project to firms such as Rio Tinto and BHP-Billiton which specialise in investing in these type of projects.  It found only one taker -- the then Australian based gold firm Normandy Resources.  The other firms with the key smelting skills cordially declined.  In short, the market and the experts decided that the project did not stack up.

Not satisfied with the market's decision, the project's proponents went to governments seeking underwriting on the basis of "national interests".  They spun the usual line:  that it would create a new industry, that it was competing with government-subsidised projects overseas;  that the project would go elsewhere;  that the commercial market was myopic;  that there was a small window of opportunity which was closing quickly.

Mr Beattie, the Premier of Queensland, took the bait in 2001 as did the Commonwealth Government.  Mr Beattie did not just put taxpayers' money into the project but did it in a manner to induce small scale investors into the project.  He agreed to guarantee a dividend to shareholders of 9.6 cents per share for eighteen months.  He also agreed to additional loans plus investment in allied electricity generating capacity.  The Commonwealth also fell for the spiel, and underwrote a $100 million subordinated debt facility plus an additional $50 million in CSIRO for research on the project's technology.  To assist the project further, Mr Beattie hit the airwaves punting the project and encouraging people to put their money into it.  Investors responded with $400 million.  Indeed in the end, the Beattie investors plus government provided 77 per cent of the project's funds.

The project hit the wall earlier this year with cost overruns in construction.  The main contractor, Leighton Holdings, and the project's only large shareholder, Newmont Mining, (which had acquired this share when it took-over Normandy) refused to put in any more money.

Earlier this month the project laid-off the entire workforce at the Stanwell site and overhauled its management -- though not before giving large pay-outs to senior staff and board members.

This week AMC wrote off the entire investment in the yet-to-be-completed plant and as a result its share plummeted to 9 cents down from its peak of just over $2.

Tax payers have lost at least $280 million and perhaps more.  There are rumours that the punters lured into the project by Mr Beattie will sue the Queensland Government for their loss of around $300 million.

To Victorians the saga is reminiscent of VEDC losses in the late 1990s.  And like VEDC, the fallout will go beyond the financial losses to blacken all related magnesium projects such as those in the Latrobe valley and in South Australia.

ADVERTISEMENT