June 12,2009

Minmetals Buys OZ

By CT Johnson

Today China Minmetals won the backing of OZ Mineral’s shareholders for its controversial $1.4 billion refinancing deal, despite a last-minute challenge from Macquarie Bank and last week’s collapse of the Chinalco-Rio Tinto tie up.  In an avalanche of support, 92% of the stockholders voted to approve the deal.

In the face of a rival proposal from Australian bank Macquarie, Minmetals acted boldly to shore up its bid on Wednesday, increasing its offer by 16% to $1.4 billion.  The move left Macquarie backers doubtful about the bank’s ability to win the contest and underwriting support for the deal evaporated.  Macquarie eventually told the OZ board that it could not produce the "degree of certainty" the board would have needed to support the rival deal. 

OZ’s board had previously rejected at least two rival offers, including a $1.5 billion recapitalization plan put forth by the RFC Group and the Royal Bank of Canada.  In both cases the board felt the offers lacked the certainty needed to ensure that the company would be able to repay the $1.1 billion in bank loans it has coming due at the end of June.  In explaining its need for a sure outcome, OZ said that it faced the possibility of being forced into liquidation by its creditors if financing did not materialize.

The disintegration of Macquarie’s challenge left the field open for Minmetals.  "Minmetal’s revised offer of US$1,386 million has been fully endorsed by the Board of OZ Minerals," the Chinese company announced in a statement. 

Following consummation of the deal, OZ will be left with $800 million and one production asset, its new Prominent Hill copper and gold mine.  All other assets will transfer to Minmetals.

Minmetals?success comes amid continued fallout from Chinalco’s failed bid for Rio Tinto.  On June 5, Rio abruptly broke off discussions with Chinalco on a $19.5 billion investment in the Australian mining giant, reportedly over disagreements in pricing and board representation.  Instead, Rio announced a $15 billion share issuance and an iron ore joint venture with rival mining firm BHP Billiton.

The Chinese government has been diplomatic in its response to the breakup, expressing only "strong disappointment about this outcome."  China’s Foreign Minister Qin Gang did appear to make a mild dig at Rio and other Western companies when on Tuesday he stated that, "Chinese (emphasis added) companies will continue to pursue the principle of equality, mutual benefit, friendship and honesty in carrying out trade outside China."  The government has made no further comment on the deal.

China’s official news agency Xinhua, however, has been unrestrained in its criticism of Rio, labeling it "perfidious" and likening its actions to those of a "cheating" spouse.  The news service reported that Australian sources indicated that Australian Prime Minister Kevin Rudd’s government was "privately voicing concerns" over the deal.  Xinhua also accused the Australian Foreign Investment Review Board of lengthening the review process from 30 to 90 days as a way of giving Rio time to find other sources of capital.

Publicly, Prime Minister Rudd, a Mandarin-speaking former diplomat to China, has gone out of his way to reassure Chinese businesses about the deal.  "We welcome Chinese investment in Australia," Rudd said on June 5.  "Our policy on foreign investment in Australia is non-discriminatory."

In related news, the China Iron and Steel Association (CISA) joined Japanese and European steelmakers in decrying the joint venture between Rio and BHP.  Despite the set-back to Chinese steelmakers from the Rio announcement, CISA has persisted in holding out for further cuts in iron ore pricing.

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