swan blocks chinese takeover of oz mine, page-63

OZ in shock after ban on China

The Age Barry Fitzgerald March 28, 2009

OZ MINERALS is frantically recasting its $2.6 billion takeover deal with China's state-owned Minmetals after federal Treasurer Wayne Swan banned the Chinese from owning OZ's Prominent Hill copper-gold mine because it sits on the Woomera rocket range in outback South Australia.

OZ is tipped to now carve Prominent Hill from its portfolio of mining assets, which also includes the Century zinc mine in Queensland and the Sepon copper-gold operation, the biggest mining operation in communist Laos.

Prominent Hill could be sold in a trade sale or "demerged" as a separate listed entity in a way in which the group's nervous banking syndicate can look to the same level of debt repayment as envisaged before the Government's forced excision of the operation from the Minmetals deal.

The shock decision has created new urgency in OZ's negotiations with its banking syndicate before a Tuesday deadline for a refinancing of $1.1 billion of the troubled group's total $1.3 billion in debt.

The move also raises the prospect that BHP Billiton — a neighbour of Prominent Hill with its Olympic Dam copper-uranium mine — could acquire the $1.15 billion Prominent Hill mine in a trade sale. Olympic Dam's copper smelter was Prominent Hill's first customer.

A shocked OZ said it was negotiating with Minmetals about "possible changes to the proposed transaction structure" in response to the Treasurer's bombshell, one that prompted fears for Rio Tinto with its proposed $28 billion bail-out by Chinese state-owned Chinalco, which must first be cleared by Mr Swan.

Chinalco last night cancelled a Beijing news conference at which it was expected to argue that the Australian Government had nothing to fear from it doubling its stake in Rio to 18 per cent, as well as acquire key stakes in iron ore, aluminium and copper assets. Chinalco was also expected to confirm that it had secured financing for its refinancing of Rio.

Despite OZ's woes and Rio's concerns, there was potentially good news for Andrew Forrest's Fortescue Metals, with the Government expected to approve its plan to raise $645 million from Chinese state-owned Hunan Valin by issuing it with an 18 per cent stake.

The three Chinese deals in the resources sector — all of which take advantage of the collapse in equity values because of the financial crisis — have become a hot political issue for Canberra, with fears rising that China would have undue influence over the pricing of Australian commodities.

A Senate inquiry into Australia's foreign investment laws began last week and Nationals senator Barnaby Joyce has questioned why Australia would allow China to buy mines here when Australia could not do the same in China.

But because of OZ's parlous financial state, few observers expected Canberra to derail Minmetal's 82.5¢-a-share cash bid for OZ.

A Minmetals spokesman said that the group's focus was on "delivering an agreed solution to OZ Minerals that meets national interests, can satisfy lenders, deliver stability to employees and protect the existing operations".

Mr Swan said Minmetals' ownership of Prominent Hill did not conform with Australia's national security interests. "The Woomera Prohibited Area weapons testing range makes a unique and sensitive contribution to Australia's national defence," he said. "It is not unusual for governments to restrict access to sensitive areas on national security grounds."

He said talks between the Foreign Investment Review Board and Minmetals were continuing.

OZ was placed in a trading halt ahead of the Treasurer's Prominent Hill decision. Shares closed on Thursday at 55.5¢.