Perilya's dwindling cash makes Chinese tie-up a rescue. Bryan Frith | January 08, 2009 Article from: The Australian BASED on Perilya's explanatory memorandum for the $45.5 million share placement to hand control to Chinese metal company Shenzen Zhongjin, the Broken Hill base metals miner needs to do some further explaining.
For months, Perilya has presented itself as being in a strong position with a "strong and clean balance sheet" and has presented the Zhongjin tie-up as a watershed that sets a platform for growth.
But the explanatory memorandum paints a different picture. The placement to Zhongjin now looks very like a rescue operation, without which Perilya could become a basket case.
ASX should press for further explanations to see whether or not investors may have been misled and, if so, whether to make a formal referral to the corporate regulator, ASIC.
Of course, Perilya's unwanted suitor, CBH Resources, believes that Perilya shareholders would be better off to accept its scrip offer of four CBH shares for each one Perilya share to enable the integration of both companies' operations at Broken Hill. CBH also points out that the value of its offer now exceeds the 23c a share at which Perilya proposes to place shares with Zhongjin. But Perilya's board continues to favour Zhongjin and to recommend rejection of the CBH offer.
In the target's statement released three weeks ago, Perilya said its balance sheet had a net cash position, with $73.6 million in cash, deposits and investments as at September 30, including "free cash" of $22.3 million, and no corporate debt. But the memorandum, released this week, shows that free cash at October 31 was down to only $10.8 million and the company concedes that its cash position since then is probably lower, with weak metal prices placing demands on cash resources and affecting cash flows.
Perilya is holding a gun to its shareholders' heads, warning that, if the placement is not approved, it would need to consider all alternatives if it is to continue beyond March 31, including an equity raising at a big discount to market, asset sales and production cuts.
Perilya has been critical of CBH for making three recent cuts in production, but it's now clear that was a prudent move and that Perilya is burning cash at an unsustainable rate.
When Perilya announced the proposed placement to Zhongjin, it said the Chinese group would provide an initial cash deposit. But when the funds were advanced, it was disclosed that Zhongjin had obtained a call option under which it could acquire Perilya's Mt Oxide copper project for a further $5 million if the placement doesn't proceed and Perilya cannot repay the deposit. That's $10 million below an earlier agreement to sell Mt Oxide to Chalice Gold Mines, which fell through because of falling metal prices, and seems to represent a distressed price.
The initial agreement envisaged that Perilya would retain Mt Oxide and the $10 million would be an unsecured debt. The option gives Zhongjin a form of security.
Reading between the lines, it appears Perilya may have been in danger of burning through its remaining $10 million of "free cash" and the deposit became a necessity, but that Zhongjin wasn't prepared to make it available unless it had some security.
PEM Price at posting:
16.3¢ Sentiment: None Disclosure: Held
