The Only Decoupling Going On These Days Is Shareholders From Their Shares

The Age

Tuesday November 25, 2008

Michael West

Owen Hegarty is merely the latest in a string of top Australian miners to be forced sellers of their own stock amid the meltdown in commodity prices.

NOBODY talks about "decoupling" any more. This was the notion that the "stronger for longer" super cycle in resources would push through any downturn in the West as the Chinese economy would "decouple" from the rest. Amid the relentless downturn and the recognition that China is also slowing, the only decoupling is shareholders from their shares.

Owen Hegarty has been forced to dump $6.2 million worth of stock in OZ Minerals after being hit with margin calls. Hegarty, who steered Oxiana from a tiny exploration play with a copper/gold prospect in Laos through to a $12billion merger with Zinifex, conceded the sale of 10 million OZ Minerals shares last week was the upshot of margin calls.

He is merely the latest in a string of top Australian miners to be forced sellers of their own stock as the meltdown in commodity prices and confidence continues to wreak havoc.

St Barbara's famous explorer and long-time Joe Gutnick associate Ed Eshuys is another reportedly hit. Straits Resources' chief Milan Jerkovic another.

Ironically, the former head of Macarthur coal, Ken Talbot, who sold out to Arcelor Mittal and Korean company Posco at the top of the market for $20 a share - it's now $3.20 - is looking particularly sage.

Formerly the golden boy of the rampaging resources and exploration sector, Hegarty has had a rough time of it this year, copping a hiding from governance groups and the media for a $10 million sweetheart pay deal arising from the merger with Zinifex.

Since then the value of OZ has been decimated by $10 billion. The stock is wallowing at a new low of 53 and, worse, has just been hit with a downgrade by broker UBS, which believes falling prices and a cash squeeze will make it hard for OZ to refinance $US600 million ($A949million) of debt due to roll in December.

The sheer pace of the plunge in commodities has hit everyone, but those with short-term financing issues are especially suffering.

After reviewing the Prominent Hill capex and Century costs then marking metals prices to market, UBS found OZ's cash outflow worse than it had anticipated.

The $US600 million of debt is against a cash balance forecast at $A680 million. The drop in the currency does not help, indeed it does none of the miners any favours. And the exit of hedge funds that had been overweight the mining sector in the good times compounds the problems.

Across the sector, share prices are so low it is impossible for even the top-ranking mining stocks to raise equity without oppressive dilution.

OZ had told the market in September that its balance sheet was strong and there was no net debt.

Grant Samuel had valued OZ at $3.80 to $4.40 a share in May.

Rats, it's Boart

MEANWHILE, the question must be asked - is the name of the world's largest drilling company spelt wrongly? Are the letters "a" and "r" around the wrong way?

Boart Longyear was floated in April last year at $1.85 a share, and briefly rose to $2.75 at its peak. Lately, it hovers at 24, despite recent guidance for a 22 per cent rise in revenue this year.

True, the Australian dollar has been shellacked and Boart has to translate its earnings out of US dollars. And true, times are tough in resources. Yet these factors would hardly account for such a dramatic drop in the share price.

Chief operating officer Craig Kipp sold half his 10 million holding in September at $1.95 - not a good look - and the company has pulled down the shutters on analysts wanting to know what is going on.

It looks like Boart is one of the greatest bargains about. Perhaps a little ray of light may be shed at a briefing slated for December 2.

However, if there is something material afoot, Boart would have an obligation to declare it, not next week, but when it became aware of the change in circumstances. The share price surely surely needs some explanation.

The best guess is it may be some issue related to currency and interest rate swaps. Although, in the half-year accounts there is nothing about currency or interest rate hedges.

But there is mention of these hedges in the 2007 annual report - but no numbers. As Boart reports in US dollars and apparently operates in 40 countries (supplying services, components and parts to

100 countries) there will be understandable volatility in its accounting.

Volume of drilling contracts with explorers is believed to be down 20 per cent across the sector. And hedges will be critical as the Australian dollar was at US96 in June but is now just US63.

Perhaps the ASX knows what is going on because it has not issued a price query.

mwest@fairfax.com.au

© 2008 The Age

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