the treachory of australian banks

Robert Gottliebsen

The big rise in both metal prices and mining shares means that Australian superannuation funds and other investors in OZ Minerals are being taken to the cleaners.

They are being asked to approve the sale of prime, highly profitable mineral assets to the Chinese owned Minmetals group at a fraction of their worth. Unbelievably, we are seeing a duplication of the terrible series of events that took place in 2003 when MIM, which was also a prime Australian mineral asset, was sold to Xstrata for a fraction of its worth.

In the MIM catastrophe it was the directors and their advisors who had to take much of the blame. With OZ Minerals I have no criticism of the directors or the Grant Samuel independent expert’s report. Indeed it is Grant Samuel’s excellent report that provided the figures that show just how far below market value OZ Minerals shareholders were selling the asset. The 2009 OZ Minerals disaster is simply about deplorable banking. At least three of our four big bank chief executives should hang their heads in shame for what they are doing to Australian investors at OZ Minerals.

There is a lot of history in this matter and the banking events that took place at OZ Minerals in 2008 are in a totally different basket to the situation in June 2009, so let's not look back.

Right now, according to Grant Samuel, OZ Minerals owes local and foreign banks about $A1.2 billion and the company is generating cash in excess of $300 million a year (KGB INTERROGATION: Andrew Michelmore, May 8). The total value of the OZ Minerals assets is several times the amount owing to the banks so these are loans covered by cash flow and asset values.

However, the bank chief executives are effectively telling OZ Minerals shareholders that unless they sell key OZ Minerals mining assets to the Chinese at a fraction of their worth then "we will pull the plug on the company and effectively ruin you by flogging the assets off at low prices". No one uses those words, but in crude terms that will be the message from the Australian government's guaranteed banks to OZ Minerals' shareholders at the meeting on June 11.

Faced with that terrible banking stance, OZ Minerals' directors have no choice but to recommend that shareholders sell a series of mining assets which Grant Samuel says are worth about $US1.6 billion at current metal prices, for just $US1.2 billion. We are handing the Chinese an immediate paper profit of $US400 million simply because of bad banking. I have no criticism of Minmetals. When they made the offer it was a fair one. If Australians are stupid enough to sell assets at a fraction of their worth then we can’t blame the Chinese.

News this morning is also important to the deal (Rio sees downside copper risk, costs fall, June 3) – metal prices will fluctuate but it will take a huge collapse to wipe out the Minmetals discount.

The matter is made more complex because OZ Minerals CEO Andrew Michelmore is going to manage Minmetals and the assets being sold, plus a new CEO is coming to manage the Prominent Hill mine and the remaining assets of OZ.

Despite this, surely there are a couple of bankers prepared to lend the company, say, $600 million (at high interest rates) which could be repaid in two or three years by advanced sales at today’s prices subject to a firm equity underwriting of, say, $600 million. Because the banks are saying to OZ Minerals directors that they will pull the plug on this highly profitable company unless there is firm proposal on the table, OZ Minerals shareholders have an awful dilemma.

Surely there is someone in the banking and underwriting industries who realises the damage this sort of unnecessary shareholder mutilation has on confidence in our markets.