all over, page-131

Anger as profitable miner goes belly up



* Jamie Freed
* December 1, 2008
* Page 1 of 2

LAST week a one-time rising star of the mining industry with a profitable operation, no less, fell into administration.

There is no better - or really, worse - demonstration of the damaging effects of the credit crisis, which has put the squeeze on miners of all sizes.

CopperCo - a company of which The Drum was admittedly a long-time fan - was forced to pull the plug after being unable to retire $45 million in debt.

Many investors are understandably outraged - at least the ones who didn't manage to extract themselves from the stock. Plenty had, sending shares tumbling in recent weeks, seemingly for no apparent reason.

In late October, CopperCo's managing director, Brian Rear, highlighted the company's strong financial position in a presentation to investors in Brisbane.

As The Drum noted last week after CopperCo entered a trading halt the company had low cash production costs of $US1.08 a pound at its flagship Lady Annie mine in northern Queensland, making it profitable even with low copper prices. Additionally, two-thirds of its revenue was protected through higher-priced hedges, leaving it plenty of free cash.

So what went wrong?

Debt was due

What was not mentioned in that presentation - or its latest quarterly report - is that CopperCo had a $45 million debt facility with Macquarie Bank which was due for repayment on December 31.

It picked up the debt through its controversial acquisition of its largest shareholder, listed mining investment house Mineral Securities, earlier this year. At the time of the deal, some observers thought it didn't make sense for CopperCo to purchase MinSec, which does not operate any assets.

There were other growth options available, such as merging with a miner such as Jabiru Metals or buying Perilya's Mt Oxide project near Lady Annie.

The market was also wary of corporate governance issues, since MinSec was headed by CopperCo's chairman, Keith Liddell. But it approved the scheme of arrangement which made the founder of Normandy Mines, Robert Champion de Crespigny, chairman of the group.

While there was plenty of promotion of MinSec's then-valuable stakes in companies such as Toronto-listed Platmin and its share of Xstrata's Lady Loretta zinc project, there was very little talk of the debt the investment house had taken on to fund its investments. In January, MinSec extended a $45 million loan facility with Macquarie to April 30. That was later extended to December 31. MinSec was confident it could meet the repayment schedule by selling one of its listed investments.
Hidden warning

In the months after the merger, CopperCo made very little reference to the MinSec debt at all - many investors probably had forgotten about it.

In preparation for The Drum last week, this columnist did not see any reference to the facility in CopperCo's most recent quarterly report. But a second look shows there is a disturbing message hidden in CopperCo's annual accounts released in late September. The auditor said the projected cashflows to September next year "clearly indicate the need for additional funding" to repay the $45 million Macquarie facility by this December.

"[That] will require the sale of assets, a new equity raising, a further extension of the loan facility or new facilities, or a combination of these to meet operating commitments and the repayment of the Macquarie Bank debt," the auditor said, noting CopperCo was already renegotiating the facility with Macquarie and was confident it would either get an extension or ensure other funds were available.

From the date those accounts were released until CopperCo entered its final trading halt, its shares sank from 29c to 5c, continuing a long share price slide which had begun months earlier when institutions unhappy with the MinSec deal began selling down the stock.

Mystery remains

The unknown is why CopperCo could not get the loan refinanced, and why it did not suspend trading until December 31 while trying to work out a deal. Was there some mysterious need for it to pay up early rather than give it time to sell the desirable Platmin stake or something else? Instead, it plunged into administration and Macquarie called in receivers who have control over its profitable Lady Annie mine.

Debt is very hard to come by, so The Drum understands CopperCo spent a week after its trading halt attempting to cut a deal with a cornerstone investor such as Xstrata, its offtake partner Glencore, or Pallinghurst Resources, possibly involving hybrid securities. Perhaps in the end the potential partners realised that if CopperCo fell into administration they could acquire Lady Annie more cheaply - and directly - from the receivers.

CopperCo also considered an old-fashioned equity raising, but for some reason the management team apparently did not hire a broker - it attempted the capital raising itself. When that didn't work, it called in the administrators a day ahead of its planned annual meeting, which was cancelled.

The receivers did not return phone calls on Friday, and Rear is unable to comment.

Fat Prophets analyst Gavin Wendt put it nicely when he told clients: "The situation with respect to CopperCo has us perplexed, angered and asking many questions."

The Drum feels the same way.

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