"After a month where its fate was increasingly in the balance,...

"After a month where its fate was increasingly in the balance, it is now probable that Oz Minerals has a future.."


12:52 PM, 30 Dec 2008 Stephen Bartholomeusz

A reprieve for Oz Minerals


The beleaguered Oz Minerals has acquired the most precious commodity available to a company in its circumstances. Time. More of it than it originally sought from its group of anxious bankers.

For the past month Oz Minerals has been teetering on the edge of a precipice as it tried to negotiate another extension of about $1 billion of bank debt that was due for repayment on 30 November. The banks had given it another month, until 29 December, with a further month available if it could satisfy some unspecified conditions, which presumably revolved around coming up with a convincing strategy for reducing the debt.

At face value that shouldn’t have been a major issue. Oz Minerals’ assets, even at today’s depressed base metal prices, would cover the debt four or five times over.

The group has, however, been burning cash at an alarming rate. In July it had about $1.2 billion of cash. Today it said it had cash of $169.2 million. In the past two weeks alone about $100 million of cash has evaporated.

The combination of lower metal prices, the cost of mothballing a number of its operations, the continuing investments in the $1.2 billion Prominent Hill copper-gold project in South Australia, the Matabe gold project in Indonesia and the expansion of the Golden Grove base and precious metals project in Western Australia and negative provisional pricing payments to smelters triggered by the severity and speed of the fall in metal prices has torn through Oz Minerals’ cash hoard.

The solution to Oz Minerals' dilemma as an asset-rich but dangerously cash-poor company was obvious. It needed to sell some assets to repay debt and release enough cash to tide it through to the start-up of Prominent Hill next month. In fact it needs enough of a buffer to get it through to about March, when the project will start to generate real and sizeable cash flows.

That meant the banks were faced with granting the group not just more time to organise asset sales, but more cash – they need to provide bridging funding until the assets are sold and Prominent Hill starts generating meaningful flows of cash.

The temptation would have been to do the selfish thing. Prominent Hill in particular is a prized asset, probably worth more than $2 billion even in the current environment. There would be a queue of interested buyers for it, headed by BHP Billiton.

The banks could have pulled the plug on the company, appointed receivers, flogged off Prominent Hill and been repaid very quickly. That would have been a disaster for the company, its shareholders, its employees and the sector.

Instead the banks have behaved rationally and responsibly. They have given Oz Minerals an extension for repayment of the debt until 27 February and have indicated a readiness to provide the bridging loans needed until Prominent Hill is up and running or some major assets sales have been made.

In return Oz Minerals has signalled a willingness to do whatever it takes to devise a permanent solution, even if it has to do the unpalatable and sell 100 per cent of Prominent Hill, the project around which it could build a very attractive future. Its preferred option is to sell a minority stake in the project.

The banks’ decision to grant the group breathing space until the end of February will help the asset sales process. Prospective buyers of its key assets have been in advanced discussions with the company but with one eye on the prospect of picking up assets cheaply in an administration.

Now Oz Minerals has a bit of time to play the bidders against each other and to generate some competitive tensions. That offers it some prospect of retaining a major exposure to Prominent Hill if forced into an outright sale, of having another big store of net cash to deploy in future. After a month where its fate was increasingly in the balance, it is now probable that Oz Minerals has a future.