In a mystery that could have come from the pen of Agatha Christie, scores of investors are wondering what has caused the sudden downfall of Oz Minerals.

On Monday, the company confirmed it was entering into a month-long suspension while it completes refinancing of some of its current loan facilities. Given the track-record of companies that request length suspensions from trading (MFS and ABC Learning Centres are recent examples), the chances of Oz Minerals returning to the boards appear slim.

Oz Minerals’ cash position has, in the space of six months, deteriorated more rapidly than pets.com. According to Grant Samuel, the independent expert assessing the fairness of the Oxiana/Zinifex merger, as at 31 December 2007, Zinifex had $2.2 billion in cash (and around $100 million of debt). Oxiana had less cash ($250 million) and a larger debt load ($420 million). This was confirmed by both companies in their merger presentation in March. The companies also claimed: “the strength of the merged entity will enable it to accelerate its development projects and to selectively pursue global acquisition opportunities. The combined group will be well positioned to participate in the global consolidation of the mining industry as it identifies opportunities to further enhance shareholder value.”

What a difference six months makes.

Citigroup now expects that Oz Minerals will have a net debt position of $500 million at the end of this year, rising to $850 million in the first quarter of 2009. JP Morgan is more downcast, claiming Oz Minerals will have a net debt position of $665 million by the end of the year. Therefore, in a year, Oxiana and Zinifex will have switched from having net cash of more than $2 billion, to potentially owing more than $500 million (according to analysts).

The ostensible reason for the sudden depletion in cash reserves is that Oxiana and Zinifex spent the first half of the year spending money like it was going out of fashion. According to the company’s presentation to investors on 21 August 2008, Oxiana spent more than $400 million developing Prominent Hill and Sepon, while Zinifex undertook a top-of-the-market cash acquisition of nickel miner Allegiance for $859 million and spent a further $511 million on capex. The lavish spending coincided with a dramatic fall in base metals prices, crippling the company’s operating cash flow.

According to Grant Samuel’s report, the cash cost of producing a pound of cooper at Oxiana’s Sepon mine in Laos during 2007 was US$0.76. While the copper price has slumped by more than 50% to US$1.59 per pound, at least Sepon appears cash-flow positive. The same can’t be said for Zinifex’s major asset, the Century zinc mine, which is producing copper at a cash cost of around US$0.80 per pound, compared with the spot price of US$0.52. Far from being the $3 billion asset claimed by Grant Samuel, the Century mine is a noose around Oz Minerals’ balance sheet, burning cash and crippling the company’s ability to expand Oxiana’s potentially lucrative projects like the Prominent Hill in South Australia. Other Zinifex assets scheduled to be developed, including the Martabe gold-silver project in Indonesia and Dugald River zinc, lead and silver mine, have also been shelved by the company.

Of additional concern to Oz’s directors (and its auditor, KPMG) would be the company’s financial statements for the period ending 30 June 2008. Released on 21 August 2008, the financial reports claimed the newly merged company had a cash balance of $1.17 billion and interest-bearing debts of around $163 million. The presentation released on the same date, however, claimed the company had $1.17 billion in cash but interest-bearing liabilities of $917.3 million (Crikey contacted Oz Minerals to explain the discrepancy, however Oz Minerals did not respond prior to publication).

Less than a year ago, Oxiana and Zinifex were in total capitalised at more than $12 billion — now the merged company’s equity may be worthless. Of those responsible for the merger, Barry Cushack remains chairman of the merged group and was recently re-elected to the board of Macmahon Holdings. Former Oxiana CEO, Owen Hegarty, will retire as a non-executive director of Oz Minerals before the company’s AGM, having recently been conveniently margin called out of 10 million shares. Hegarty was paid an ex gratia sum of $8.35 million in August by Oz Minerals after shareholders rejected an earlier payment of $10.66 million.

Peter Fray

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