One year ago, Owen Hegarty and Oxiana were on top of the world. Oxiana’s share price had risen from less than 10 cents in 2001 to more than $4.00, valuing the company at $6 billion. Hegarty was hailed as a one of the best mining executives in the country, with naïve speculators happily quoting his prediction that commodity prices would be “stronger forever”. Oxiana’s performance was largely driven by its extraordinary Sepon gold and copper mine in Laos, which was purchased from Rio Tinto (Hegarty was previously a Rio executive). Last year, while at the peak of his power, Hegarty (who owned 27 million Oxiana shares), decided to merge Oxiana with zinc and lead miner, Zinifex.

The dream of creating a diversified, cashed-up miner has quickly turned into a nightmare, with Oz Minerals shares closing at only $0.63 cents yesterday — valuing the merged entity at $1.97 billion.

The merger was announced in March 2008 — at that time the market valued Oxiana at $6.1 billion and Zinifex at $5.4 billion. Therefore, while the merger was one of “equals”, Oxiana shareholders were actually paying a small premium to Zinifex shareholders based on market values at the time of the announcement. The deal was championed by Hegarty’s Oxiana and Zinifex to shareholders largely based on the benefits of a more diversified asset base. Oxiana, through its Sepon mine, was largely a copper and gold producer, while Zinifex derived 87 percent of its revenue from zinc production, predominantly at its Century mine in Queensland.

Less than six months later and the prognosis for Oxiana shareholders isn’t good. Yesterday, Oz Minerals announced that “net profit after tax for 2008 is expected to be lower than that reported by each of Oxiana and Zinifex in those companies’ prior financial periods [and] at this stage it is still not possible for Oz Minerals to provide a reasonable and meaningful indication of 2008 profits for the purposes of market guidance.”

A few weeks earlier, Oz Minerals boss, Andrew Michelmore (who was previously the CEO of Zinifex) noted that the company would consider ceasing production at its Century mine. Michelmore noted that that closing Century was “something that we’ll be looking at, we certainly wouldn’t want to be continuing to produce at these sorts of prices for any length of time.” Zinifex’s total costs of producing a pound of zinc at Century are believed to be above US$0.80 — well above the current Zinc spot price of US$0.52. The more Oz produces at Century, the more money it loses.

Six months earlier, Zinifex’s independent expert, Grant Samuel, in its report on the Oxiana-Zinifex merger, claimed that the deal was “fair and reasonable” for Zinifex shareholders (as the scheme was conducted by Zinifex and Oxiana shareholders did not vote, no expert’s report was provided for Oxiana shareholders). Grant Samuel determined a value of $6.5 billion for Zinifex’s assets (based on an assumed zinc price of US$1.00 to $1.20). Of that valuation, the bulk was assigned to Zinifex’s Century mine (approximately $3 billion), which is now loss-making and currently worthless. The independent expert derived a valuation of around $6.8 billion for Oxiana, based on its Sepon assets ($2.5 billion) and its Prominent Hill mine ($2.9 billion).

While Zinifex contributed a cash pile of more than $1 billion, its operating assets are now valued by the market at approximately zero. Oz Minerals wrote down the value of Zinifex’s Avebury Mine and Canadian assets by $602 million shortly after the deal was completed.

Zinifex shareholders have good reason to thank Michelmore and former chairman, Peter Mansell, for successfully diversifying their asset base away from zinc and lead (other zinc and lead miners, CBH and Perilya, are now trading at ‘penny dreadful’ levels). Despite Oxiana’s copper and gold assets also falling in value, they are at least still profitable.

By contrast, Oxiana shareholders would be less chuffed with the deal driven by Hegarty and Chairman, Barry Cushack, having lost more than $5 billion since the merger was announced.

Cushack remains Chairman of the merged entity, while Hegarty was appointed non-executive director after resigning as CEO of Oxiana. Given their roles in the fiasco, some suggest that Cushack and Hegarty’s days may be numbered. Hegarty’s personal holding in the miner has fallen in value from more than $100 million to $17 million, although fortunately for him, his blow has been cushioned by one of the most controversial “golden handshakes” corporate Australia has witnessed.

In August, Hegarty received a payout of $8.35 million from Oz Minerals, for which the company did not obtain shareholder approval. A few weeks earlier, Oxiana shareholders rejected a proposed $10.66 million ex-gratia payment, largely because it involved paying Hegarty $5.4 million for effectively worthless options. The man many shareholders hold responsible for the merger and the Hegarty payout, Barry Cushack, recently suffered an extraordinary protest vote at construction company MacMahon Holdings. Cushack, who was seeking re-election at MacMahon received a stunning 26 percent ‘against’ vote — one of the highest ever recorded against a board recommended candidate.

As the zinc price continues to slump, it appears that the only asset class which is “stronger forever” is Owen Hegarty’s bank account.

Peter Fray

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