share buyback. how does it work?, page-14

MX,
Good analysis. I wish, though, to add a little more.

Companies normally do cash flow projections going out 5 years (Business Plan timeframe). These cash flow projections would have assumptions on copper prices, net production costs, capital expenditure, exploration, mtce, dividends and overheads. I would be assuming that OZL would have done one for 10 years to take into account the capital required for C.

With the base model created, scenarios are then run. I would be assuming they would be running scenarios like

a) what happens to cash flow if we buy SFR using (i) cash, (ii) cash and debt, (iii) cash, and script, (iv) debt and script.

b) what happens to cash flow if we discover another P Hill and need to expend capital to bring it to production using (i) cash, (ii) cash and debt, (iii) cash, debt and script.

c) what happens to cash flow if (a) and (b) occur

Each scenario would be reviewed and maybe the two best options for each scenario would be chosen. Some sensitivities would be run probably around AUD, gold and copper prices.

This is then presented to the CFO, who discusses it with the CEO. The data would be; for each year, what the range of free cash would be. If there is excess cash (i.e cash over and above all scenarios), then the decision by the board needs to be made, does OZL return it to sharsholder and if so, how best to return it to shareholders.

Options here are
a) capital return
b) special dividend
c) off market share buyback
d) on market share buyback.

Of these 4 options, for Aust shareholders (b) and (c) work well when their are excess franking credits. For OZL, that will not happen for 3 or 4 years. OZL has just done a capital return, would the ATO allow another one and not treat it as income? Probably not. That leaves (d).

So, there we have it, $200m is excess to needs and an on market buyback is being done.

HT1