interview posted

ALAN KOHLER, PRESENTER: Well to put some perspective on China's current appetite for cheap commodities businesses this week's $2.6 billion bid for debt stricken Oz Minerals was only a small part of the $80 billion investments China has committed to around the world in the past 10 days. The all cash bid for the nation's third biggest diversified miner is a startling capitulation for a company which when put together only nine months ago was valued at almost $12 billion. Had $2 billion in cash and a strong portfolio of metal reserves.
I spoke to Oz Minerals chief Andrew Michelmore earlier this week.

Well Andrew Michelmore is it fair to say that this is Min Metals or bust? That if this deal doesn't go through OZ Minerals is in receivership?

ANDREW MICHELMORE, CEO, OZ MINERALS: Alan, absolutely at this point in time having stared down the barrel of receivership or voluntary administration at least three times in the last few months, this is the best outcome for our shareholders.

ALAN KOHLER: You mean the only outcome?

ANDREW MICHELMORE: Well we've looked at all options of how we can do it and they are very complex, we have to replace effectively $1.1 billion minimum of debt through sales through raising some funding through equity through commodity link things, all very complex and you have to put them all together in the one place at the one time to be able to deliver it.

ALAN KOHLER: And you still need the banks to extend don't you

ANDREW MICHELMORE: Absolutely in all cases.

ALAN KOHLER: Are you confident that they will?

ANDREW MICHELMORE: Logic says this is a fantastic outcome for them it solves their problem, yes they should extend.

ALAN KOHLER: But have they shown so far that they will?

ANDREW MICHELMORE: Look I think some of them, particularly the offshore banks, are required to get those funds home as soon as possible, they have been told, pull it back, don't care what it means, pull it back and I think that's where the difficulty will come. It won't be easy but again logic says this guarantees you an outcome, you get all your cash back and with a company that has got the funds to do it, it's not subject to financing and so yes logic says you should do it.

ALAN KOHLER: And you put the company on the market effectively a while ago, how many potential buyers kicked the tyres?

ANDREW MICHELMORE: We had lots of buyers kicking tyres of individual assets, they thought it was a fire sale pick up absolute bargains but we had to raise a certain amount of money, in terms of looking at the whole company, we've had people looking at bits of equity in the company and that's where Min Mets started they look at taking a placement; a cornerstone placement and as they did more and more due diligence they said no actually we want the lot, so this is the only one that has come for the lot.

ALAN KOHLER: And as and you reflect on what's happened here in the past sort of 12 months of roller coaster riding that you've been through, do you wish you hadn't bought Allegiance Mining?

ANDREW MICHELMORE: Oh gee if I had my time over again you would say no way, if I knew that the metal prices were going to be down at this level, you know our long term metal prices for nickel was at least $7.50 not sitting at the levels like this, no there's no way you could justify Allegiance at the moment.

ALAN KOHLER: But about nine months after you paid 55 per cent premium for Allegiance you closed its main operation Avebury Mine in Tasmania saying that it wasn't profitable, I mean that's incredible destruction of value isn't it?

ANDREW MICHELMORE: Look I think from September into October, November the amazing drop, the speed with which commodity prices dropped, the view on the outlook of those commodities going forward totally changed the long term view and the instantaneous prices, copper's off 68 per cent, zinc fell another 44 per cent, nickel came off around 60 per cent as well and more importantly the whole view of the confidence going forward for those commodities disappeared. That was the basis, the long term basis going forward in demand for the nickel evaporated.

ALAN KOHLER: I mean I don't want to dwell on Allegiance, that was your decision the Zinifex Oxiana merger had been announced at that point but you didn't you decided to go ahead and buy Allegiance?

ANDREW MICHELMORE: I was certainly CEO as that decision had been made, I started in February the decision had been made in December...

ALAN KOHLER: So you did inherit the decision?

ANDREW MICHELMORE: The decision was made in December and I was aware of that decision being made through that period, I took up as CEO the 1st of February but that information being provided to me, everything looked sensible, that was a sensible investment.

ALAN KOHLER: Shareholders presumably would say well that's what we pay CEO's and boards for is to ok, so things changed, it was, obviously the entire world has changed, but you pay people to make decision that are correct at the right time not to overpay for assets at the top of the cycle?

ANDREW MICHELMORE: Your comment there, correct at the right time and you can only go with the information you have at the time so decisions you are making now have to be judged in the circumstances we have now and the outlook, decisions made back then...

ALAN KOHLER: So that deal probably ate about half the cash that was in the company, close to half, where did the rest go?

ANDREW MICHELMORE: Yes when we merged the company we had about $900 million of cash on the books we paid $150 to $160 million on dividends, we've paid about $250 million on Prominent Hill on completing, just in that period, the construction of that project, we've got a large investment in the cut back at Century so key components, and we've also invested in Martarbe and Sepon expansion so it was in all the expansion in the capital expenditure sides of the business which was our platform, it was putting the two together, provided the projects on one side and the cash to be able to finance that growth.

That all changed in October, the change from September to October in terms of expected revenue in the following year was over a billion dollars, that is unbelievable to happen in such a short period of time.

ALAN KOHLER: In fact it seems from the outside to be one of the great corporate tragedies this; for a company to go in nine months from about $4 a share price and having a whole lot of money in the bank to broke, it is amazing.

ANDREW MICHELMORE: It is amazing and the issue was that our commitment to our gearing back then was very low. Even at the moment you would say for this deal it shows gearing of about 30 per cent. That would be typical at the peak of the market and if you think of how much we've dropped it shows you the strength of the company that we are actually in that position.

What we've been hit with is a short term liquidity squeeze because we have those key investments, particularly Prominent Hill and Century which once completed then generate cash so we had this hump of need of extra cash which comes back second half of the year.

ALAN KOHLER: Do you know whether Min Metals is going to keep you on?

ANDREW MICHELMORE: I guess at this stage they are saying they want all the management, they are buying a total team, but nothing in writing. My job at the moment, number one, number two, number three is focussed on delivering best returns for the shareholders, actually make sure we don't go into receivership.

ALAN KOHLER: And do you know how corporate governance works with companies like the estate owned Chinese firms, how will they actually run it?

ANDREW MICHELMORE: Look all the information I have is they want this as their offshore vehicle to grow their base metals business, they have a number of entities that they have to report back to and they are very committed to corporate governance.

ALAN KOHLER: And do think they'll use it as a base to make more acquisitions in Australia?

ANDREW MICHELMORE: I certainly think so, I think they are going to see this as a platform to really grow their business, they get assessed on what return they generate on the funds they've been able to put in. So they're not interested in special deals selling our products at lower prices they actually want the best prices out of them it generates the best return, they get support.

ALAN KOHLER: So you can see them making more takeovers in Australia?

ANDREW MICHELMORE: Look I can certainly see them as we settle everything down it's going to be a number of months down the track to do that. The question then will be with the base we've got the things we've had to cut back what should we be doing actually now that we've got the finance to be able to do them? What really adds value to the company, in addition to that they'll be looking at what's outside that could add value.

ALAN KOHLER: You might be doing it for them. With all this Chinese money.

ANDREW MICHELMORE: I could be but my first focus is we've got to deliver this for our shareholders and our employees, our suppliers all our stakeholders.

ALAN KOHLER: Thanks for joining us Andrew Michelmore.

ANDREW MICHELMORE: Thanks Alan.