The OZ Minerals fiasco continues, with the company releasing a statement yesterday explaining exactly how its net cash balance of $300 million morphed into net debt of $678 million. As OZ Minerals begrudgingly conceded, at the same time as it spent $700 million (on mine development and dividends), the value of its US denominated debt rose substantially as the AUD fell. In Australian dollar terms, OZ Minerals’ debt (which was largely inherited from Oxiana) ballooned to $1.08 billion (US$693 million).
Despite slumping commodities prices and debt concerns, OZ Minerals spent $158 million at Prominent Hill, $101 million at the loss-making Century zinc mine, $65.8 million on “other developments” and $144 million on dividends. The company also appeared to lose around $133 million from mining operations between July and October — with cash flowing out the door at a rate of $33 million per month.
OZ Minerals supporters contend that once its Prominent Hill mine is ramped up, the company will be generating hundreds of millions in free cash flow annually. However, these backers are starting to resemble the hopeless gambler who asks his bookie for a few more months to pay off his debts, with that big win just around the corner.
Even if it is able to convince its banks to refinance debt facilities, the OZ Minerals story appears to be one of gross managerial incompetence. The primary role of any executive is to efficiently allocate shareholders’ capital. In OZ Minerals’ case, the company has been spending billions of dollars on developments which, based on current commodity prices, are marginal at best. Had the company used its cash pile conservatively, repaid debt and reduced dividends earlier this year, it could have easily sustained an extended period of lower metals prices.
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Instead, the company gambled with shareholders’ equity and appears to have lost, badly. In the last 10 months, OZ Minerals (and Oxiana/Zinifex) have spent around $2 billion on development and acquisitions. That expenditure could have easily covered OZ Minerals’ debt. OZ Minerals executives and directors have failed to properly foreshadow global economic weakness and reduced demand for base metals like copper, nickel and zinc (instead believing that commodities would be “stronger forever”). If OZ Minerals executives aren’t able to forecast underlying demand for the products they sell, one wonders exactly what they are there for? We suspect Andrew Michelmore doesn’t spend much time extracting zinc at Century and Owen Hegarty is too busy banking his $8.35 million golden parachute to mine copper at Sepon.
Meanwhile, Crikey owes OZ Minerals an apology, incorrectly alleging on Wednesday that there was a discrepancy in the company’s June 2008 financial statements (rather, the statements were poorly explained, relating only to Zinifex, not the merged entity). However, OZ Minerals did appear to erroneously classify a US$420 million debt facility as a “deferred liability” instead of a “current” liability. It is this facility which is due to be refinanced by 29 December 2008. OZ Minerals argued that as at 30 June 2008, the company had a “positive relationship” with lenders and felt that the facility would “not be subject to repayment in the short-term unless the company failed to use its best endeavors to refinance those facilities.”
Perhaps this should have been disclosed to shareholders, but given OZ Minerals has spent billions on developments that are now being mothballed, its failure to classify a liability correctly isn’t the least of its concerns.