MINSEC—II Nagging question: “how much better can we do?”

Press, Volume CXI, Issue 32554, 13 March 1971, Page 11

MINSEC—II Nagging question: “how much better can we do?”

(By

GAVIN SUTER)

Mineral Securities Australia, Ltd, started slowly enough but once the accelerator went down there was no stopping it. “Mount Isa and C.R.A. took 20 years to get on top,” says one of Minsec’s consultants. “The other extreme is Ken and Tom, who moved like the wind. They never made a wrong move until the end.”

The company was launched six-and-a-half years ago with a capital of only $200,000 and it did not go public until 1967. In those early days Ken McMahon and Tom Nestel provided a mining investment service for an exclusive list of clients, including six brokers. Metal prices were on the move then, and the two partners found attentive audiences when they called once a week at brokers’ offices. "Ken and Tom would talk to us for an hour,” recalls one of those brokers. "They’d say, ’We like the look of Mount Lyell because so and so,’ and generally we found that their advice was good. We paid them $2OOO a year.”

Minsec was also share trading for itself, and in its first year as a public company it made a net profit of $1,584,091 compared with only $160,873 the year before. Almost all of that came from the roaring stock market. Testing time "In view of the unusual boom condition,” said Mr McMahon in his 1968 chairman’s address, “it is not easy to judge how efficient or skilled we have been. There is little doubt that we have done well but one always asks the question, ‘How much better might we have done?’ The testing time will come in a more difficult market climate.”

Minsec’s managing director, Tom Nestel, and his young lieutenant, Surrey Bogg, thought the market

was tapering off in November, 1969, and started getting out. Realising later that the market was still going ahead, they moved back during December and stayed in long enough to benefit spectacularly from the Tasminex boom in late January, 1970. In the course of a few days trading Surrey made more than a million dollars for Minsec and one of its subsidiaries. Oil Investments, Ltd. This feat was mentioned in the Wilson Report on Tasminex. Heard rumours “Mr Bogg gave the following reasons for the purchases which he made on January 23 : d 27: (a) On Thursday, January 22 an employee of Kennth McMahon and Partners Pty, Ltd, reported to Mr Bogg that there were rumours that ‘drilling was going on at CosmoNewberry’; (b) on Friday, January 23, Mr Bogg heard rumours in Sydney that two employees of Tasminex had been drunk in the Laverton Hotel on the previous night and ‘supposedly their information was that this drillhole had obtained an intersection of nickel sulphides.’ “(c) He said that ‘at that time the share market was the wildest I had known it, personally, in my experience’; (d) the chartists suggested that ‘we were coming into a third wave in a major bull market’; (e) the particular area where Tasminex was interested had been for some years the area where rumours had been very strong and had affected the market. Mr Bogg felt that if there was to be a third wave it would have to involve another discovery in that area.”

Minsec’s chartist, 24-year-old Peter King, was right about that third wave. Trading charts are said to reveal trends fairly clearly in a bull market, and, contrary to practice in some other offices, Mr King always completed his charts for the preceding day before the next day’s market opened. Last coup Tasminex was Minsec’s last big trading coup on the dying market. Bogg and King were both taken off portfolio work last February (King was put in charge of Mount Ringwood, a cattle station Minsec had bought in the Northern Territory), and th' company did little more trading. In 1969-70 it had made a net profit of $12,707,079, compared with the previous year’s $1,423,344. Three-quarters of the latest profit came from share trading. The other quarter of the profit came mainly from mining operations, and it was to this sector —investment of money in the ground rather than the stock exchange—that Minsec was now increasingly directing its attention. “We have been share traders,” said Ken McMahon in 1969, “and now we want to generate real profits from the development of existing mines and exploration for new ones.” This had been Minsec’s idea all along but the bonanza of 1969-70 opened broad new vistas. “How much better might we have done?” That tantalising question could now be rephrased for long-term mining investment: “How much better can we do?” The sky was the limit Mine buying Minsec’s first mineral subsidiary was Northwest Tantalum, a listed exploration company which it bought in 1967 and renamed Amad NL. Amad was Minsec’s mineral exploration arm. Another subsidiary Petroleum Securities Australia, Ltd, established in December, 1967—was to perform in the oil industry a function similar to Minsec’s in mining. Petsec in turn spawned an oil equivalent of Amad, Pexa Oil NL.

Minsec went shopping for mines as well as searching for them. In February, 1969, with the prodigious profits of that year already in .hand, the company bought B.H.P.’s interest in the Aberfoyle group of tin and wolfram mines. Three months later it bought into the beach mining companies of Cudgen RZ Ltd and oCnsolidated Rutile, Ltd.

By September, 1969, Minsec had acquired controlling interests in both the Aberfoyle and Cudgen groups. Cudgen and its subsidiary, Consolidated Rutile, are together Australia’s second largest mineral sands producer. Kenneth McMahon and Partners and Minsec had been meanwhile interesting themselves in mineral exploration overseas. From January, 1968, until May, 1969, Amad was prospecting all over the Sudan. This came about through Ananda Krishnan Tatparandandam, a very personable and astute Malaysian Indian, who introduced Ken McMahon to a Sudanese veterinary surgeon named Dr Khalil Mahmoud. Krishnan, an honours B.A. from Melbourne University and a master of business administration from Harvard, met Dr Peter Solomon, a consultant geologist to McMahon and Partners, at a Harvard reunion in Sydney about

1966. Solomon introduced him to McMahon, who quickly came to share the (then) 28-year-old Malaysian’s enthusiasm for business opportunities in SouthEast Asia. McMahon may even have had some of this enthusiasm already. The chronology is not clear. Asian venture Some time after this, McMahon and Partners (S.E. Asia) Pty, Ltd, later divided into McMahon and Partners Malaysia SDN BHD and McMahon and Partners (Thailand), Ltd began operations in Asia. Its men in the field looked for tin, iron ore, antimony, kaolin, flourspar, rutile—“anything that would make a dollar,” as one former M Mahon geoloist puts it.

There were offices in Kuala Lumpur and Bangkok, and at Manila an Australian geophysicist named Greg Kater was and still is general manager of an exploration company called LepantoMcMahon Corporation. Lepanto is a big copper group in the Philippines, and Mr McMahon is believed to have been put in touch with it either by Ananda Krishnan or Washington Sycip, a prominent Filipino accountant.

Mr Sycip became friendly with Mr McMahon, and the two families exchanged their children during school holidays. That is the measure of Mr McMahon’s commitment to Asia. Another measure was the formation last November of the Asian Development Foundation, a non-profit merchant bank intended to act as a catalyst between Australian and Asian business interests in establishing profitable commercial enterprises in Asia, particularly Indonesia. The executive director of ADF is Dick Wooton, a Presbyte iar. missionary who met Tom Nestd! at their common church in Chatswood. Nestel is chairman of the foundation, and McMahon is a council member. Mr Wootton’s office is at Kenneth McMahon and Partners. The Sudanese project came about through Dr Mahmoud, who had some Kuwaiti money to invest. He was out in this part of the world looking into the shrimp industry in the Gulf of Papua. His connection with Kuwait was formed while he was employed as a veterinarian at.the stables of Kuwaiti Foreign Affairs Minister, and he later came to exercise considerable financial influence both in Kuwait and Saudi Arabia. In the Sudan Amad’s exploration of the Sudan was promising, but in May, 1969, there was a revolution. Although the new revolutionary council at Khartoum offered to preserve the status quo as far as mineral exploration was concerned Dr Solomon recommended that Amad should fold its tents and quietly steal away. Last year McMahonMinsec formed two new connections with South-East Asia. Ananda Krishman, who was by then running the London office of Kenneth McMahon (U.K.), Ltd, had arranged an oil drilling lease off the southern coast of Sumatra for Pexamin, an oil search company registered in New Jersey. Pexamin is engaged in a joint $12,750,000 drilling programme with a Reynolds Tobacco subsidiary called American Independent Oil. Minsec’s oil search subsidiary, Pexa, now has a one sixth interest in Pexamin, Mr Krishman is a director. The president of Pexamin, incidentally, is Dr Thomas Cantwell, a highly regarded Texan geophysicist who once lectured Dr Solomon at Harvard. The geologist’s world is a small one. The other new connection with Asia is the Chenderiang Tin Dredging Company, operating near Perak in Malaysia. Mr Krishnan had been helping Mr McMahon plan some new exploration companies in South-East Asia when he realised that Britain’s august Crown agents, business agents for a large number of Governments and public authorities, were major shareholders in both the Perth-based merchant bank Westralian International, Ltd, (an investor in Minsec) and Chenderiang Tin. Not all approved On the basis of this link, the Crown Agents, McMahon and Krishnan decided that McMahon and Partners could better offer technical consultancy services in South-East Asia through an established agency, namely Chenderiang, than through Kenneth McMahon (U.K.), Ltd. Amad (Minsec’s prospecting company) now has a one-ninth interest in Chenderiang, and one of the McMahon partners, Jeremy Caddy, is on the board. Not everyone at McMahonMinsec approved of these moves into Asia. “Krish was pulling Ken one way,” says a former colleague of both men, “and the partners were pulling him the other, though Tom came round a bit to the overseas commitment Krish was a great influence on Ken.”

For one thing, Mr Krish-

nan appears to have played an important part in launching Minsec into the new field of equity funds. Equity Funds of Australia, Ltd, with Mr Krishnan as a director, was launched last February to act as a management company for the Australian Growth and Income Funds, aimed at people with money in savings banks or other low-yield situations, and its first Growth and Income Fund raised $lO million in two weeks flat.

E.F.A. employed two consultants—Kenneth McMahon and Partners, and Management Associates International. M.A.I. trades from Malaysia and Australia and is believed to have a loose association with Arthur D. Little, one of the largest management groups in the United States. It is an offshoot of Turnbull, Krishnan and Company Pty, Ltd, management and investment consultants.

Mr Krishnan’s partner is 37-year-old Shann Tumbull another Harvard graduate in business administration, son of Senator R. J. Tumbull from Tasmania, one of the young men who founded Tjuringa • Securities with Gordon Barton in 1965, and now chairman of Direct Acceptance Corporation. Mr Tumbull started as a director of Equity Funds of Australia but withdrew last July over a matter of policy. Biggest deal Minsec’s biggest deal by far last year was its purchase at issue of 17,500,000 $1 shares in Robe River, Ltd, the Australian company which is a 35 per cent partner in the $257-miliion Cliffs Robe River Ore Associates joint venture in the Pilbara region of Western Australia. This gave Minsec a 44 per cent interest in the Australian partner, and by last October it had increased this to 51 per cent. The joint venture looked as if it might never get off the ground when its underwriters, Darling and Company came to Minsec last March. The American shipping magnate Daniel K. Ludwig had pulled out of the venture, probably because he wanted to take Robe River’s ore away in his own gigantic ships and Mitsui, the Japanese partner, would not agree to this.

No reason was given, however, and the inference was there to be drawn that perhaps Ludwig was worried about the ore grade at Robe River. Although the grade was known to be lower than at the other Pilbara projects —Mount Goldsworthy, Hamersley and Mount Newman—the concept had always been that Robe River’s low-grade ore would be pelletised. But what if the ore was too hard to break down? What if Ludwig knew something? Quick decision In to this vacuum stepped Minsec, almost without a backward glance. This was mostly Tom Nestel’s doing. Confidence was restored and the project revived. “We looked at it quickly for obvious flaws.” said Mr McMahon, “but were happy to stand by the assessment made originally. We said yes in 10 days—probably the quickest we have made up our minds about anything.” So there was Minsec at the end of its third year as a public company: the complete mining house that McMahon and Nestel had envisaged five years before. “The Mineral Securities Group now consists of 14 listed public companies basically engaged in mining." said Mr McMahon proudly in his diairman’s address last November. “The company controls eight different minerals. We are now the second largest rutile-producing group in the world, the second largest producer of tin and wolfram in Australia, and a member of an international consortium which is projected to be the largest iron ore pellet producer outside North America.” Not bad for three years; but it was not enough. Minsec had again asked itself that nagging question: “How much better can we do?” In the new plans it was already making for yet another venture lay the seeds of its imminent ruin.

(To be continued)