http://www.theaustralian.news.com.au/story/0,25197,23370619-23634...

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Perilya (PEM) $1.05

CRITERION: Tim Boreham | March 14, 2008
MORE games are being played with Perilya scrip than those slated for Beijing in August. Another Olympian swan-dive saw the Broken Hill zinc and lead miner's shares retreat 11c, or 9 per cent, taking the year-to-date decline to 55 per cent.

It looks to be another case of short selling, aimed not at margin calls but at depressing Perilya stock as it negotiates a scrip merger with fellow Broken Hill stalwart CBH.

"All companies are operating in an environment in which investors have varying incentives," is Perilya chief Len Jubber's Delphic remark.

Perilya shares have tumbled 40 per cent since the parties fessed up to chatting on February 21. Back then, both stocks had a market cap of $350 million each. Now Perilya is the junior party with a $206 million valuation, compared with CBH's $299 million.

While no one except the perpetrators really knows what's going on, presumably the stock is being trashed by parties keen on forcing Perilya to pay a higher conversion ratio for CBH scrip. The trouble is, they may have been too successful: at current price levels, Perilya is unlikely to gift-wrap its assets and hand them over to CBH holders.

We hasten to add that Perilya has proved single-handedly adept at missing out on the mining boom. Production shortfalls and the retreating zinc price have combined to render its mainstay Broken Hill mines operations barely profitable.

But the nasties have been well aired. At its February 29 interim results, management downgraded full-year production to 90,000 tonnes of zinc and 55,000t of lead, from 95,000-105,000t and 55,000-60,000t respectively.

Since then, management has had nothing to say about why the stock has sunk.

According to Jubber, that's because little has changed operationally. "We are on track to achieve what the market was told about in recent announcements," Jubber says. "I can't comment on corporate activity (but) discussions are under way."

Jubber says Perilya's Broken Hill gee-up program is going to plan, as is the sell-down of a 300,000t ores stockpile containing 100,000t of zinc.

Putting Perilya's valuation in context, the company has debt of only $24 million and net cash of $86 million, equal to 44c per share. The value of the stockpiled zinc alone could well account for the rest, which leaves one tired but still-productive mine (Broken Hill) going for nix.

As with base metals cousins Oxiana and Zinifex, the vaunted Perilya-CBH union makes sense in many ways. Broker Patersons estimates $200 million in savings, but also says that on current valuations, hitching with CBH would inflict too much CBH on Perilya punters.

Criterion, a long-suffering holder of Perilya scrip, rates the stock a long-term buy. Your columnist certainly wouldn't be selling at such a vulnerable point. Unlike Pasminco, former owner of Perilya's assets, at least Perilya is not in danger of going broke.

As for CBH, it is theoretically the better entry point into a merged entity, so we'll ascribe a speculative buy.