the australian article

Matthew Stevens | December 05, 2008
Article from: The Australian
ANDREW Michelmore's mates say he is a tough guy and a very good driver in heavy traffic. Well, right now, he needs to be.

Michelmore runs OZ Minerals -- a company suddenly fighting for its very survival. And no one other than perhaps the Commonwealth Bank can really say just why that should be.

To the utter astonishment of its management and owners, OZ Minerals is currently suspended from trading as it thrashes out a all-of-company refinancing by December 29.

If Michelmore and his team cannot secure at least a letter of offer from its new banking syndicate by that date, then OZ Minerals might well have no future at all.

Yes, there is an option in the agreement thrashed out over the weekend for OZ Minerals to apply for an extension of a month, but that is only likely to be requested and delivered if the company has received the offer.

The reason for this sudden, unseemly rush is that late on the afternoon of November 27, the financing rules by which OZ Minerals had been living were suddenly changed.

First, a little history. OZ Minerals is the product of the much criticised merger of emerging copper-gold aspirant Oxiana and Zinifex, the rebranded owner of long-established zinc and lead operations.

Michelmore ran Zinifex and it delivered a staid set of assets but a relatively rich balance sheet into the merger, while Owen Hegarty's Oxiana provided the growth profile story with a copper and gold project pipeline and a healthy, but hardly outrageous, $750 million or so of debt.

As it stands, OZ Minerals owes $1.08 billion to a total of 11 banks through four separate facilities. Of them, Zinifex generated but one: a $250 million facility with Societe Generale.

The balance of the arrangements were originated by Oxiana and the current problems centre on two of those facilities, one of $US525 million of which $US420 has been drawn down, and the other of $US140 million, all of which has been drawn.

The facility that matters here is the $525 million one delivered by seven lenders: ANZ, Bank of Scotland, BNP Paribas, the now infamous Hypo Bank, NAB, Royal Bank of Scotland and Ralph Norris' Commonwealth Bank.

There is some understandable surprise and genuine angst that there is any issue with the repayment of this facility. As colleague Bryan Frith has observed, as recently as June this year, Oxiana classified the facility as a deferred liability and yet we now find out it was repayable by December 31.

The reason for this is that there was "best endeavours" clause in loan agreements, which meant that, as long as OZ Minerals made substantive efforts to re-finance the loan, requests for extension could not "unreasonably" be withheld.

OZ Minerals had already rolled the facility once and believed that it could do so pretty much until it was able to complete a refinancing. Then the Commonwealth said "yes, but ...".

The CBA said it would roll, but it wanted a higher level of security. Michelmore and the OZ Minerals board decided the following morning that they could not deliver on the request without triggering other default clauses. OZ Minerals went into a trading halt and the timeframes for its refinancing suddenly got tight. Life is a bit of a roller-coaster inside OZ Minerals right now. But there is a quiet confidence that a deal will be done. And when, or rather, if it is, don't expect to see the CBA among the names of OZ Minerals bankers.

The amazing thing here is that, for all OZ Minerals has made a messy start to its combined life, it remains a business of some considerable merit.

No doubt its financial results will be mauled by price declines, which mean its Century zinc operation is cash-negative right now. But this is a company in transition to a stronger future and its balance sheet doesn't look anywhere near shaky enough to imagine that a bank should put the business through. I mean, yesterday OZ Minerals confirmed it had, as at November 30, $405 million in cash sitting with banks.

OZ Minerals was valued at near enough to $10 billion at its birth in July. But, with its business case severely dented by the global financial crisis's impact on commodities markets and its shares under assault by the shorters, OZ Minerals was rapidly headed for junior status when trading was halted on November 28 with its market capitalisation sitting near $1.7 billion.

Within two years, on the back of its new $1.2 billion Prominent Hills copper, gold and silver mine in South Australia, OZ Minerals is likely to be generating EBIT of circa $900 million and, barring new capital initiatives, to be debt-free.

But two years is a long way away now. Right now Michelmore's horizon cannot extend too far beyond the 24 days OZ Minerals has left to replace its four heritage banking facilities with something sounder and a whole lot longer.

Oh, and any of you OZ shareholders out there who might bank with the Commonwealth, why not get on the phone to your manager and ask what on earth they have done to your company's reputation?