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A guest contributor and aggrieved Pasminco watcher has pulled together this piece on what is an unmitigated disaster for shareholders overseen by long-serving chairman Mark Rayner.

In what many Pasminco shareholders might now consider a triumph of that unique and venerable Melbourne business quality, vanity, over reality, Chairman Mark Rayner took the novel tack of announcing this disaster as “, 05.a significant restructuring to enhance shareholder value, 05”

So far so good. But there was more from Mark, who said: “, 05The Board’s objective is to , 05..address the company’s present financial difficulties.”

Shareholders might have been sensing some alarm at this stage. What financial difficulties?

Mark’s news release then climbed into a Warnie-type positive spin bowl, and in a display of vintage Melbourne vanity, trumpeted : “In order to enhance shareholder value, the Board has decided to , 05..”

Expectant shareholders could have been forgiven at this stage of Mark’s news release for thinking that (a) Mark and his Board were calling the shots with good old fashioned and resolute decision making in the interests of shareholders; and (b) goodies of enhanced value for shareholders were in the offing.

A picture springs to mind of Mark ‘Horatio Hornblower’ Rayner gripping the wheel, and squinting through the hail, shot and shell, he and his officers confidently setting a course off the lee shore away from that pesky cannon fire that threatens the well-ordered shipboard life of the ACN Pasminco’s directors and the ship’s precious cargo.

But there was more, and Mark then proceeded to throw in the steak knives.

Phrases like “appropriate liquidity support”, “discussions with lenders”, “reduce debt” and “as appropriate close out currency hedges” dripped from Mark’s news release. Crikey, what’s next? What could it all mean. Yes, the share price had been a little soft of late, but with the chaps in charge, everything was alright, wasn’t it? .

Shareholders didn’t have long to find out. Mark’s restructure was more like an assetdectomy because it seemed the good ship ACN Pasminco was hard aground on the banks and shoals, so to speak.

It seemed that the salvage experts had deemed that one of the main trinkets in the hold, the $1.2 billion or thereabouts Century Zinc mine, had to be offloaded in a salvage operation (called a fire sale on land, which is exactly what the ship was on) to refloat the ship and reduce its material exposure. And the ship’s CEO, Mr David Stewart, after nine years at the helm, was walking the plank, so to speak.

Well good one Mark. Still, with a chairman who is also chairman of Australia’s No 1 bank, the National Australia Bank, the shareholders would have been confident that Mark would have informed them well ahead of time of any material exposure to this spot of bother, wouldn’t he. After all, that’s his style, isn’t it?

Anything else the owners of the ship should know at this stage? Well, actually, yes.

It seemed like the paragraph in the year 2000 Annual Report under Currency options, released on 22 September 2000, may not have put things quite as clearly as shareholders might now have liked.

It said: “The effect of this strategy is to protect US$2,279 million of revenue against a rise in the Australian/US dollar exchange rate above US68 cents while forgoing the benefit of a fall in the exchange rate below US 65 cents”.

In the fullness of time, the “forgoing of benefit” seems to have been some sort of bankers’ code for what became an $800-900 million hedge loss. Shareholder’s could now probably grasp the full import of Mark’s cryptic sub-text “as appropriate close out currency hedges”.

Plain text now seems to be “the Board decided to sail ACN Pasminco into hedge waters without charts and telling the owners, but things didn’t work out too well and shareholders have a billion dollar wreck on their hands.

On 25 July 2001 for example, you could sell the Aussie for a princely US50.8c, a far cry from the benefit gift “floor” of US65c.

Even in July 2000, the casual dockside observer at the vanity fair dock in Melbourne could tell the good ship ACN Pasminco was carrying some condition. In fact, it now seems the ship’s officers had difficulty in distinguishing the funnel band from the Plimsoll line.

As the Annual Report released on 22 September 2000 patiently explained “this is referred to as a cap and floor option strategy”.

Shareholders could be forgiven for thinking that ‘Horatio’ Rayner might have known about such things, and could distinguish the difference between the funnel band and the Plimsoll line. After all, he is, at least for the time being, the Chairman of the National Australia Bank, and skilled in managing risk and material exposures to the owners, and keeping them properly informed, isn’t he?

Obviously, there was nothing material to disclose, because otherwise good ‘ole Alan I Beckett, Partner, Melbourne, of Ernst & Young, Pasminco’s auditors, would have disclosed it, right? Nope, he gave Pasminco the usual tick of approval.

Shareholders probably now view the “cap and floor” option in the full harsh light of day, away from Melbourne’s rose coloured vanity fair as a “trash and burn” strategy, in which reality has collided with vanity to wreck the good ship Pasminco with some good old material exposure to harsh reality.

Of course, if good ‘ole Alan I Beckett, Partner, Melbourne, of Ernst & Young thought everything was just fine on 30 August 2000 when he signed the audit report, then why should shareholders have been alarmed earlier? Were they asleep or something? Well no, not really, although the Australian Shareholders Association seemed to have missed it. The plummeting Pasminco share price was certainly a cause for concern and the shareholders and the market were looking for reassurance from those titans of commerce, Mark and the men.

By the end of May 2001, with the ACN Pasminco sitting markedly lower in the water at about 50 cents per share, the ASX decided to call up the bridge of ACN Pasminco just to check that Mark and the other master strategists had things all buttoned down and shipshape.

Here’s what Mark’s boys had to say from the www.pasminco.com.au website, which cheerily still opens with WELCOME TO PASMINCO. It might just as well say GOODBYE TO PASMINCO:

30 May 2001

RESPONSE TO MEDIA ARTICLES

In response to an enquiry from the Australian Stock Exchange, the directors confirm there are no matters that require disclosure. It is the long standing policy of the company not to comment on speculation.

Media reports of intended changes in the composition of the Board reflect statements made by the Chairman at last years’ Annual General Meeting of shareholders, when it was indicated that some directors will retire this year and that action would be initiated to secure suitable replacement directors. Appropriate announcements will be made when changes occur.

The intention of the company to undertake a wide ranging strategic review of all of its assets was announced on 15 December 2000 as part of a Business Improvement Program. The review was also referenced in the announcement of Pasminco’s half year results on 28 February this year. No decisions have been taken on the future of individual assets and the strategic review continues. The interest of third parties in the possible purchase of our Broken Hill assets has been announced to the market.

As previously advised, Mr Tony Barnes was appointed Executive General Manager, Finance & Services on 5 April 2001. There are no plans to make further changes at the executive leadership level.

For further information contact:

Trevor Shard

Group Manager – Investor Relations

61 3 9288 9186 or 0419 584 515

Well good one Trev. We wouldn’t have wanted any comment on any speculation, would we?

The fourth of June 2001 dawned and ACN Pasminco graced the press lists with some disclosure and a word of thanks to Tony Daniels for his contribution to the Board since he became a Director in January 1996. Shareholders may now question whether thanks to Tone were really the order of the day. Here’s what Mark and his boys Trev and Pete dished up to the market that day, straight from Pasminco’s public website, which must be accurate. Daniels has the wonderful trifecta of Orica, Pasminco and Pacific Dunlop so he’s a great source of confidence.

4 June 2001

BOARD CHANGES AT PASMINCO

Pasminco Limited today announced the resignation from its Board of Mr Tony Daniels.

Mr Ross Herron has accepted an invitation to join the Board as a non-executive director and fills the casual vacancy created by Mr Daniels resignation.

Mr Herron is a senior partner of PricewaterhouseCoopers and the leader of its Mining and Energy practice. He has been the audit partner for a number of Australia’s leading resources companies and brings to the Board considerable expertise in the areas of financial and capital management and a close knowledge of the mining and metals industry.

Prior to the recent appointment of Mr Tony Barnes as Chief Financial Officer of Pasminco, Mr Herron acted in this role for four months in an interim part-time capacity under a consultancy agreement with PricewaterhouseCoopers, which also provides outsourced internal audit services to Pasminco.

The Chairman of Pasminco, Mr Mark Rayner, thanked Mr Daniels for his contribution to the Board since he became a Director in January 1996 and welcomed Mr Herron as a Director who brings outstanding expertise and industry experience to the Board.

For further information contact:

Peter Griffin

Group Manager Public Affairs

61 3 9288 0463 or 0419 314 265

Trevor Shard

Group Manager Investor Relations

61 3 9288 9186 or 0419 584 515

Well, that was nice Trev and Pete, and Mark’s words of thanks just hit the spot – nothing liked a burnish to the vanity eh Mark? And what great reassurance to shareholders to be informed that Mr Herron is:

“a senior partner of PricewaterhouseCoopers and the leader of its Mining and Energy practice. He has been the audit partner for a number of Australia’s leading resources companies and brings to the Board considerable expertise in the areas of financial and capital management and a close knowledge of the mining and metals industry , 05. Prior to the recent appointment of Mr Tony Barnes as Chief Financial Officer of Pasminco, Mr Herron acted in this role for four months in an interim part-time capacity under a consultancy agreement with PricewaterhouseCoopers, which also provides outsourced internal audit services to Pasminco.

No sign of any financial difficulties at this stage. The state of the internal audit would have to be just hunky dory wouldn’t it, with such obvious talent on watch?

Seems though there were still some doubting Thomases out there in the real world, prompting a nicely worded release to the ASX on 14 June 2001:

14 June 2001

STOCK EXCHANGE RELEASE

NO REASON FOR SHARE PRICE FALL

Pasminco advises that it is not aware of any issues that might have prompted today’s fall in the company’s share price. The recent decline in metals prices and zinc in particular, adversely impacted the Pasminco share price earlier this week.

Pasminco continues to deliver its Business Improvement Program and the ramp-up in production at the Century Mine. The previously announced asset review is also proceeding to plan.

The Business Improvement Program is delivering sustainable improvement in costs and production.

For further information contact:

Trevor Shard

Group Manager Investor Relations

++61 (3) 9288 9186 or 0419 584 515

Peter Griffin

Group Manager Public Affairs

++61 (3) 9288 0463 or 0419 314 265

Shareholders obviously took to the news of the Business Improvement Program and the “ramp-up in production at the Century Mine” and did a bit of ramping of their own to the share price.

Aggrieved shareholders will recognise the same sort of soothing spin from major banks who suffer share price weakness; prospect of higher or lower interest rates (makes no difference, both are good reasons to trot out), spot of bad publicity that should be disregarded, no material exposure, unjustified bank bashing etc etc, blah blah blah.

On 20 June 2001 the ASX then had a go. Mark’s two deckhands Trev and Pete then had another crack at it, wheeling up the merits of Century Zinc with the reassuring noises that:

“The company continues to concentrate its efforts towards delivering improved production and reduced costs. The Century Mine is presently operating above 90% of capacity and the production ramp-up continues on schedule for completion by December 2001.”

Shareholders could have been forgiven for thinking that saviour from Century Zinc Mine was at hand and all would be well by December 2001. Silly them.

20 June 2001

RESPONSE TO STOCK EXCHANGE ENQUIRY

Pasminco advises that it has no new information which might affect the value of, or could explain the recent trading in its shares.

As has already been announced, the company’s revenue stream has been adversely impacted by the decline in metal prices. Notwithstanding this impact, Pasminco is able to meet all of its commitments as and when they fall due. The company has already completed all principal loan repayments due this calendar year and is not in breach of any banking covenants. It currently has undrawn facilities of $125 million.

The company is well advanced with a Business Improvement Program announced last December which is delivering substantial cost reductions and production improvement. This initiative will deliver a sustainable improvement in the underlying performance of the business at the rate of $ 100 million per annum by the end of calendar 2001. This plan is already delivering benefits ahead of internal targets. It is unfortunate that the decline in metal prices is distracting from these gains.

Pasminco reported a loss after tax of $37.3 million for the first half, and as flagged to the market in its last quarterly report on 26 April 2001, does not expect to be profitable this financial year. The second half loss is likely to be similar to that of the first half despite the deterioration in the metal process.

The company has already announced a review of each asset in its portfolio with a view to disposing of those that are not capable of generating an adequate return on funds employed. This review is also well advanced and discussions are underway with various parties who have indicated an interest in acquiring some assets from Pasminco. In particular negotiations for the sale of the Broken Hill Mine have already commenced.

The company continues to concentrate its efforts towards delivering improved production and reduced costs. The Century Mine is presently operating above 90% of capacity and the production ramp-up continues on schedule for completion by December 2001.

For further information contact:

Trevor Shard

Group Manager – Investor Relations

++ 61 (3) 9288 9186 or 0419 584 515

Peter Griffin

Group Manager – Public Affairs

++ 61 (3) 9288 0463 or 0419 314 26

Crikey! Everthing must be OK then. Nothing like continuing a ramp-up on schedule, which apparently continued up to the 20 July 2001 announcement of the measures that Mark and crew had cooked up to “enhance shareholder value” .

On 22 July 2001, Mark rocked up to the Business Sunday Program on Channel Nine, and was asked some fairly pointed questions, and with credit to their website www.ninemsn.com.au, here are some extracts:

Chairman, Mark Rayner, talks to Ali Moore.

Reporter: How long have you got? What is the period of grace from the banker?

Mark Rayner: Well there isn’t a period of grace, the bankers understand what we’re doing in terms of restructuring. I think they’re as keen and confident as we are that this is the right way to go.

Reporter: David Stewart goes effective from the end of the month, but don’t you and other board members have to take responsibility for the problems?

Mark Rayner: We absolutely have to accept the full share of the responsibility. The board ratified and endorsed the recommendations that came to it in the 2 key areas that have proved to be very bad decisions, and the board doesn’t resile from that and neither do I.

Reporter You’ve said you’ve talked to the board, to the advisers, to the bankers about your position, what was their reaction?

Mark Rayner: There reaction was that we’ve got to get this restructuring finished and you can’t remove everybody and expect the business to go forward. I’ve talked to them about my retirement from the board and the answer has been, you may want to talk about that later but right now the task at hand is to get this restructuring sorted out and through.

Well bully for the bankers. Everyone seemed to know what was going on except the company’s owners.

Looks like the bankers also decided that the ACN Pasminco could be lightened up a little bit more and two of the directors, David Mcfarlane (also an ex-NAB director) and David Brydon jumped ship later in the week, as Trev and Pete announced. Interestingly, this time, there were no thanks forthcoming from Horatio for their contributions in the service of shareholders. After all, what more could they have done?

27 July 2001

CHANGES TO BOARD OF DIRECTORS

Pasminco Limited advises that Mr David Brydon has retired from the Board of Directors with effect from today. Mr David Macfarlane has also advised of his intention to retire as a Director with effect from the conclusion of the company’s annual general meeting on 31 October 2001.

For further information contact:

Trevor Shard – Group Manager Investor Relations

+61 (3) 9288 9186 or 0419 584 515

Peter Griffin – Group Manager Public Affairs

+61 (3) 9288 0463 or 0419 314 265

The Board of Pasminco is (or was) an all-Melbourne line-up:

Directors still serving shareholders (although shareholders may take issue with that description) are:

Mark Rayner – Chairman – also Chairman of the National Australia Bank

Geoffrey D Allen

Andrew F Guy

Ross M Herron

Directors Resigned

David Stewart – CEO

David J Brydon

David K Macfarlane (notice to resign)

Shareholders now know that corporate undertakers Ferrier Hodgson are on location at the ACN Pasminco but no-one is saying whether they have been taking coffin measurements. KPMG (also auditors to the National Australia Bank) are also on location. It is not known how long they have been toiling at Pasminco. But with Mark at the helm, and as the top banker in Australia at NAB, shareholders will no doubt be sure they’ve got a man experienced in dealing with banks and “keeping them keen and confident , 05.. that this is the way to go”.

Way to go Mark.

Now shareholders, what is to be done about all this?

Why not ask ASIC for a start you say. The ASX appears to have been on the ball, but vanity reality Melbourne biz style seemed to be in sharp contrast to real life.

So here’s an open letter on behalf of shareholders to David Knott, Chairman of ASIC. There’s no suggestion that any officer or director or anyone else associated with Pasminco has done anything wrong of course, just like Brad and Jodee and Ray and Rodney, but there’s nothing like being sure.

Dear Dave

cc Pete Wood – ASIC Enforcements

HIH was a bit of a stuff up whilst you were at APRA. And the well publicised raids on the homes of Rodney Adler and Ray Williams seem to have hit a spot of bother before the NSW Supreme Court. And ASIC have given Jodee Rich and Brad Keeling the public treatment.

Heck, even the PM Mr Howard and the Treasurer Mr Costello weighed in in a public spirited way on free-to-air national television lambasting the (alleged) wrongdoers and exhorting them to give up their (alleged) ill-gotten gains and how terrible it all was.

So here’s a chance to score one for the shareholders, Dave.

For a start, why doesn’t ASIC trot along to the nearest JP and get some search (and shareholder rescue) warrants and raid the houses of the Pasminco directors and their auditors, Price Waterhouse Coopers, Ernst & Young, Ferrier Hodgson, and Pasminco’s offices in Melbourne?

Please try and take a bit more care with the search warrants and specify the documents you are looking for a bit more carefully than with Rod and Ray.

May be a judge would be the way to go, but you know best, with your wide experience of such matters.

And because there are plenty of possible visitees, if you start now, you should be able to book up sufficient TV and media crews to provide full coverage of the event which is so obviously required.

Anyway, here’s a start on the list of things to look for.

The hedge contract and identities of the counterparties.

All notes, correspondence, etc relating thereto (like the legal flavor there Dave?)

The auditors’ workings and all correspondence relating to the hedge (Dave, the relevance is that it may have sunk the company, but other than that, it’s incidental – just a thought)

The related hedge parties.

Details of who’ pulling who’s chain on this exercise of “enhancing shareholder value” at Pasminco. Perhaps you could have a good look at the banks who are involved.

The role of ‘Horatio’ Rayner and the banks and the little matter of timely and transparent public disclosure.

Who was selling Pasminco shares and when.

Dave, you get the gist? Probably not necessary to draw you a picture.

Anyway Dave, to the extent you need a complaint to kick things off, why wait.

Yours very truly

Value-enhanced Pasminco shareholders (VEPS)

Whilst we’re on ginger letters, here one for you, Joe Hockey.

Dear Joe

cc letter to Davy Knott

CC J Howard – PM

CC P Costello – Treasurer

The boys at the vanity fair in Melbourne have got themselves in a spot of bother with one of their stewardships, Pasminco.

Could you take time out from advising on turning Sydney into an 8 million strong refugee camp and ask Dave Knott to do his job, distasteful as the prospect might sound considering the august Melbourne identities involved, and make some inquiries. No-one says they have done anything wrong, but just check the circumstances, that’s all.

The sort of money we’re talking about is not large in the scheme of things, about a billion, but it’s the principle of the thing, the vibes Joe.

Now you’ve cut your teeth on things at HIH and One Tel, what about it Joe?

There probably aren’t many votes in it, but why not have a go anyway. It’s actually your job.

YVT

VEPS

As for the VEPS, there’s always the prospect of recovering the bill or so lost on the hedge and or Century Zinc if they flog it by suing the insurers of Ernst & Young and the Directors. Heck, why stop there. Have a close look at Ferriers, KPMG and Price waterhouseCoopers and any one else like the banks who advised Pasminco on its hedge strategy whilst you’re at it and see what they knew whilst the soothing statements to the market and the ASX were being expelled. Remember Proctor and Gamble with BT in the US? Just might be some mileage there. No-one is saying they’ve done anything wrong, but maybe there’s some fertile ground in them thar hills and with the smell around you just never know.

Soros, Snout and Ferret

Hedge and Mining Consultants to the Melbourne vanity end of the market

cc ASX

Peter Fray

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