what thepapers say, page-3

ommentary

1:02 PM, 5 May 2009



Stephen Bartholomeusz
Saving face at Oz


The planned gutting of the Oz Minerals board and the resignation of its chief executive if shareholders approve the $1.75 billion sale of most of the company’s assets to Minmetals could be interpreted as an admission of culpability for the plight Oz Minerals ended in. The reality is that Andrew Michelmore and his board deserve plaudits they’ll probably not get for salvaging something of value for their shareholders.

Michelmore in particular has been the target for some shareholder hostility, but even greater vilification in the media. His planned resignation and transfer to a senior position in Minmetals will take him out of the harsh spotlight that has shone on him ever since Oz Minerals began imploding last year.

The downsizing of the company isn’t some kind of gesture to the desire of some for retribution for the loss of value, but a rather more mundane recognition that the ‘’new’’ OZ Minerals – a one-project company focused on the Prominent Hill copper-gold site in South Australia – doesn’t need the superstructure built for a far larger and more diverse group. Five of the eight existing directors are departing, along with 80 per cent of the head office staff.

While the decimation of Oz Minerals’ value has been extraordinarily severe, it will start its new existence – with some help from Wayne Swan, who vetoed the inclusion of Prominent Hill in the Minmetals deal on national security grounds – with more than $500 million of cash and a very attractive cash-generating project which cost more than $1.2 billion to develop.

The fact that there is anything of value left for shareholders is due to the frenetic response of Michelmore and his team to the blizzard of shocks that undermined the company and delivered it into the hands of its bankers.

He has described it, aptly, as a "perfect storm". After Zinifex and Oxiana merged last July, Oz Minerals was happily working away at a refinancing of the new group, with $1.2 billion of cash in the bank and net assets of about $6 billion. It would have had, with hindsight, a lot more cash had Zinifex not made the $850 million takeover of Allegiance Mining and its Avebury nickel mine ahead of the merger.

Before Oz Minerals could formalise the refinancing, however, Lehman Brothers collapsed, credit markets panicked, and copper and zinc prices plummeted overnight, falling nearly 50 per cent and 40 per cent respectively within two months.

From a budgeted $300 million of cash flows in 2009, Oz Minerals was confronted with the prospective loss of more than $1 billion of revenue. The confluence and speed of events was unforeseeable.

Oz Minerals’ response was urgent. It slashed nearly $500 million from capital expenditures, suspended projects, cut operating expenditures by nearly $200 million and carved into its headcount. It was still, however, investing heavily in the final phase of development at Prominent Hill and the suspension of mining at its other projects carried big up-front costs.

That forced it to seek bridging support from its lenders pending and refinancing and/or asset sales. Ultimately, it resulted in the sale, subject to shareholder approval, of most of its asset base to Minmetals, but only after the group teetered on the brink at the mercy of nervous bankers.

Had Oz Minerals re-financing been finalised earlier, or scheduled for some later moment, the Oz Minerals story may have been rather different. It was vulnerable at precisely the worst moment.

It is easy to blame Michelmore and his board for the effects of events completely outside their control. A more sympathetic view, however, would be that, in the unprecedented circumstances, where everything that could go wrong did go wrong overnight, they actually didn’t do such a bad job.



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