Wise heads ... after the fact
31 March
Sean Russo
YOU have got to try hard to be loved less than a banker, I know, but this is one of those times.
I promised my colleagues I would stop ranting on about the demise of Oz Minerals (the former) but I feel the need to respond to Barry FitzGerald’s recent update on Oz (Sydney Morning Herald Tuesday 23/3): ‘China’s Minmetals toasts bargain buy of OZ assets’.
He opens up with “Profit figures released yesterday ... confirmed that the Chinese group got a very, very good deal – helped in part by Oz’s nervous nelly banking syndicate forcing the garage sale of the OZ mining assets in the first place.” (My emphasis).
Later he reinforces this point by talking about the likely value (1.5-to-2 times) if those assets were sold today. “But OZ was never given the chance by its banking syndicate to ride out what proved to be a temporary squeeze on its cash flow from the collapse in commodity prices….OZ was forced into the garage sale of assets after its banking syndicate baulked at extending its debt facilities”.
Bank bashing is easy points Mr Fitzgerald, but in this case they’re cheap points. To do justice to the clear disaster that was the OZ garage sale I believe the article should have given credit where credit was due.
You got close when you said “helped in part by Oz’s nervous nelly banking syndicate”. In part, the banks were involved – a small and sad part, but at least they ultimately defended their shareholders’ interest which is what they are paid to do. Don’t bash the banks for doing the right thing by their stakeholders. Do question why they lent that much money to a mining company without any commodity price protection in place, particularly a company that despite its grand vision was still all fur coat and no knickers.
The part in the garage sale not played by the bank was played by the Wizards of OZ. It is with them that most of the blame should squarely rest. Commodity prices are volatile, revenues of miners expand and contract, debt obligations stay the same. A company with massive levels of debt ($A1.2 billion) and no commodity price certainty is more geared to the downside in prices than it is to the upside, a fact that should be in the basic curriculum for trainee resource bankers and is well known to short selling hedge funds.
Of course it was not a concern for the Wizards. With their hedging gene removed and a mantra of not “Stronger for Longer” but “Stronger for Ever”, they charmed their way into the position in which they found themselves with their banks. But this is where I particularly take umbrage with Mr Fitzgerald’s characterisation. The banks may well have gone to the fine print in the documents and ultimately forced the sale but they didn’t force OZ to borrow the money in the first place.
This is the big thing, Mr Fitzgerald. Oz’s position was a result of its Wizards’ work and it was by design not by accident that they found themselves beholden to the banks. From the outside it would appear not one of the Wizards or their apprentices had given a second thought to the fact that commodity prices might retreat to levels that were until fairly recently pretty common.
Furthermore it should be well known to old hands like the Wizards that the key to keeping bankers onside is keeping them confident you know what you are doing and you have a plan to repay. To the contrary, it would appear neither the Wizards nor their bankers had a handle on the cash that might be available for debt service if this quote, from BRW, December 3, 2009, The Epic Battle to Save OZ Minerals, is anything to go by: “At the start of October (2008), Michelmore ordered a review of operations based on spot price earnings rather than analysts’ still high expectations for metal prices. The projections showed OZ losing $1 billion in revenue”.
Not exactly the kind of stuff that encourages a bank to not “baulk at extending its debt facilities”, wouldn’t you think?
The irony drips from the page when Mr Fitzgerald then quotes MMG’s MD Andrew Michelmore (former Head Wizard of OZ) as saying “the results demonstrate the consistent returns and long term value of these high quality assets” and “a solid platform from which to grow the business”. I have no doubt it spoiled the breakfast of thousands of the true believers that had been under the Wizards’ spell.
Bash banks for lousy service, bash banks for outrageous fees, bash them when they display hubris or they are caught being plain greedy. So yes, they are fair game most of the time. But don’t bash them for protecting the rights they have to be repaid.
Mr Fitzgerald, if you were looking for an easy mark, when it comes to tales of OZ, look no further than the Wizards. They are all still around, several still playing with the very assets the shareholders of OZ are now denied because the Wizards thought hedging was for mere mortals. In doing so they denied their shareholders the ability to have short-term price protection that would keep the banks happy while allowing them the opportunity to build a solid platform from which to grow the business and, ultimately, deliver results that demonstrate the consistent returns and long term value of those high quality assets.