4:30 PM, 4 Dec 2008 Stephen Bartholomeusz The blizzard of OZ
The nature and depth of OZ Minerals predicament has become clearer with the release of more information on its financial position. The mystery of how a company that less than six months ago had cash of more than $1.2 billion could today be in the hands of its bankers is also starting to be resolved.
When Zinifex and Oxiana merged on July 1 to form OZ Minerals it looked like the perfect marriage between Zinifex’s cash and Oxiana’s projects and development pipeline, although at the time Oxiana shareholders were grumbling about the exposure to a depressed zinc price. As it happens, it is the cash-hungry project-financed Oxiana portfolio that has probably brought the group undone.
In July the newly-merged group had cash of $1.2 billion and about $900 million of debt, mainly within Oxiana, or net cash of about $300 million. By 30 November they had net debt of $678.4 million. In the space of four months nearly $1 billion of cash evaporated.
It didn’t all evaporate. The statement from OZ Minerals today shows that between July 1 and October 31 about $705 million of net cash flowed onto the project portfolio – the Prominent Hill project, the Century mine, the Sepon copper project in Laos, the Martabe gold/silver project in Indonesia and about $144 million was paid out as dividends. There was a massive splurge of cash into the projects.
Some did, however, evaporate. OZ Minerals says that from June 30, the 30 cent depreciation in the Australian dollar relative to the US dollar caused debt, measured in Australian dollars, to blow out by $365 million – nearly 40 per cent of the movement in net debt can be attributed to the movement in the currency.
So, the cash hoard that Zinifex brought to the marriage was dissipated in a matter of months by pouring it into the project pipeline even as OZ Minerals’ debt was being blown out further by the collapse in the dollar and even as the economics of its projects were being radically undermined by the sudden meltdown in commodity prices.
That wouldn’t have normally have tumbled the group so quickly into the sweaty clutches of its bankers, but OZ Minerals was in the process of shifting its debt funding from project financings to a corporate facility under an agreement reached with Oxiana’s banks back in February.
Under that agreement the debt was supposed to be refinanced by August, but was subsequently extended to November 30, with OZ Minerals taking comfort (false comfort, as it transpired) from a clause that allowed the refinancing date to be pushed out again as long as it had used its best endeavours to procure a refinancing.
Unfortunately, the banks didn’t agree to a further extension, with suggestions that one recalcitrant lender – seeking to use the situation to improve its own security – is to blame for OZ Minerals’ failure to gain another extension, which has left the group teetering on the brink.
Having deferred capital expenditures totalling nearly $500 million, cut budgeted spending by $185 million for next year and delayed commissioning of the $1.2 billion Prominent Hill project there isn’t a lot OZ Minerals can do other than plead its case with the lenders.
At the moment the core facilities all mature on December 29 unless the banks agree to a further extension, although OZ Minerals has options to extend its bigger facilities for a further month, subject to some unspecified conditions. There appears to be some differences of position within its lending group, which would be a cause for concern.
While OZ Minerals is engaged in desperate and delicate negotiations with its lenders, the vultures may be circling. Morgan Stanley has just outed itself as a substantial shareholder in the company. The immediate speculation was that Xstrata was positioning itself to make a bid for OZ Minerals.
Xstrata is thought to have looked at bidding for Oxiana in the lead up to the finalisation of the merger with Zinifex. The outlook for commodity prices did, of course, deteriorate as the year progressed.
Oxiana, because of its big exposure to the copper price and sensitivity to commodity prices generally because of its project pipeline and the value the market had attributed to it, had a leveraged exposure to that deterioration that may have scared Xstrata off.
It is unclear whether Xstrata has capacity at present to finance any significant expansion. It has been the most aggressive and acquisitive of the big resource houses during the boom, piling up second-tier acquisitions that wouldn’t stack up too well in the current environment.
It is, however, sponsored by the commodity trading group Glencore and it would be in character for both groups to use the current distress in the sector to pick up high quality assets cheaply. The OZ Minerals portfolio would fit neatly within Xstrata’s base metals business.
If OZ Minerals can convince its bankers to give it a reasonable extension for the refinancing of the debt, of course, its moment of extreme vulnerability to an exploitive bid may pass.
OZL Price at posting:
0.0¢ Sentiment: Hold Disclosure: Held
