OZ Minerals to defer projects and cut operating costs
OZ Minerals will defer several capital projects and make substantial cuts to operating cost budgets as a result of the review of capital and operating expenditure it announced to the market recently. The Company has also identified further synergy benefits flowing from the merger of Oxiana and Zinifex.
In summary, OZ Minerals:
* will defer capital expenditure of approximately A$495 million (net);
* has identified total merger synergy benefits of A$54 million per annum;
* will reduce operating expenditure budgets in 2009 by approximately A$185 million, in addition to the merger synergy benefits mentioned above;
* will cut annual production of zinc from Century by 20,000 tonnes per annum.
“The formation of OZ Minerals through the merger of Oxiana and Zinifex was designed to - and has - created a company with a rich pipeline of future projects and a strong balance sheet”, said Mr. Andrew Michelmore, Managing Director and CEO of OZ Minerals. “We must ensure we protect this position we worked so hard to create so that we can realise maximum value for shareholders when market conditions improve. The decisions we are announcing today will enable us to either eliminate or defer substantial cash outflows at a time when access to capital is more difficult than at any time in the last decade and when we are in the middle of re-financing our debt facilities.
“These are tough times but we understand the position and we have a very experienced team. We are critically looking at every aspect of our operations to enable us to come through this period without cutting into the fabric of the business.
“The review process will be ongoing in order to ensure we do not miss any opportunities to strengthen OZ Minerals – now and for the future”, Mr. Michelmore concluded.
In summary, the decisions announced today are as follow. Please note that, where US dollar amounts have been converted to Australian dollars, the conversion has been at the current spot rate of A$1.00 = US$0.65.
1. Capital expenditure
* Martabe gold-silver project in Indonesia to be suspended and capital expenditure of approximately US$225 million (A$345 million) deferred until after 2009.
* Sepon copper expansion will be suspended and capital expenditure of approximately US$50 million (A$77 million) deferred until after 2009. Commissioning of the second autoclave, which is currently on site, will continue.
* Surface facility renewal at Rosebery has been deferred resulting in the deferral of capital expenditure of A$125 million. Work on the new tailings storage facility and the underground ventilation upgrade will continue.
* Development of the open pit copper prospect at Golden Grove will be delayed; capital expenditure of around A$20 million deferred.
* The Feasibility Study into the Izok Lake and High Lake projects in Canada will be deferred. Focus in Canada will be on further exploration.
* Dugald River will not be commenced in 2009.
See Attachment ‘A’ for details of capital expenditure decisions.
Commissioning at Prominent Hill, for which a substantial increase in resources was reported in September 2008, continues and the project is currently 93% complete. Some electrical and small-bore piping works are behind schedule, with the result that commissioning is now expected to be completed in January rather than December. The total project cost, previously estimated at $1.08 billion, has been revised upwards to $1.15 billion (which includes a $10 million contingency).
“We currently have approximately 2.5 million tonnes of ore on the ROM pad and 60,000 tonnes of crushed ore ready for the mill”, said Andrew Michelmore. “We look forward to making our first sales of Prominent Hill concentrate and receiving our first cashflow in the first quarter of 2009”.
OZ Minerals has restructured the cut-back at Century which will reduce production from a forecast 515,000 tonnes of contained zinc in concentrate in 2008 to 495,000 tonnes in 2009. The restructuring will also defer approximately A$20 million of cash outflow while still providing improved access to the ore body and ensuring that future production planning is not constrained.
“I am aware that some analysts and investors believe we should defer the cut-back, but it is not in the best interests of the Company to do so”, said Andrew Michelmore. “We closely analysed a number of options for Century, and continuing with the cut-back is the best option for the Company in both the short- and longer-term. We will continue to look at ways of further reducing operating costs”, added Mr. Michelmore.
2. Operating costs
A review of budgets for 2009 has reduced planned operating expenditure by approximately A$185 million to date. The budget review process is ongoing and further reductions will be sought.
A$98 million has been cut from current operating budgets in Australian operations. The major components of the reduction are:
* Golden Grove: A$36 million;
* Century: A$28 million;
* Prominent Hill: A$19 million;
* Rosebery: A$10 million;
* Avebury: A$4 million.
Further costs reductions in Australian operations are expected to be identified through a continuing review of operating costs, and a reduction in contractor numbers is likely as a result.
Operating costs in Asian operations will be reduced by approximately A$50 million, and budgeted corporate office costs have been cut by A$17 million.
A further significant part of the reduction has been in the Exploration budget. In addition to the identification of A$20 million of savings resulting from merger synergies in exploration, OZ Minerals will reduce its exploration budget by a further A$18 million in 2009 and tighten the focus of its activities. The exploration budget for 2009 will be A$63 million.
“To be able to grow into the future, mining companies must explore and they must make discoveries”, said Andrew Michelmore. “A successful exploration program requires a great team, which we have, great leadership, which we have in Tony Manini, and corporate commitment to the importance of exploration, which we are emphasising today”, Mr. Michelmore added.
“But, we must have focus and, in the current situation, we must also be careful in how we invest our cash. For 2009 and beyond, our focus will be on expanding discoveries around our current operations where we believe prospectivity is high and in selected other areas which are considered to be highly prospective and where OZ Minerals has established a competitive advantage”. Mr Michelmore concluded.
As a result of this review, OZ Minerals will be focussed on expanding copper, zinc and nickel inventories around Sepon, Prominent Hill, Century and Avebury, and drill-testing large, high-quality copper, nickel and zinc opportunities in Australia, Asia and Canada.
Integration has progressed faster than planned, and the final meeting of the OZ Minerals’ Board Integration Committee was held last week.
“We have now identified cost savings attributable to the merger of approximately A$54 million per annum, providing a better than one-year payback of identified one-off integration costs of A$47 million”, said Andrew Michelmore.
Significant identified annual savings include:
* the rationalisation of two exploration teams: A$20 million;
* strategic sourcing initiatives: A$11 million;
* labour savings: A$8 million;
* IT rationalisation: A$6 million.
OZ Minerals is in negotiations to refinance its debt facilities. A key feature of the refinancing will be a restructuring from project finance facilities to a corporate facility structure.
The negotiations are not yet complete and the Company is required to seek an extension of certain of its current facilities, which is envisaged in the facility documentation, to enable the negotiations to be completed in a timely manner. The current facilities for which extensions are required comprise one facility of US$420 million and one of US$140 million. Lenders in the smaller facility have agreed to the extension, and negotiations to achieve the extension of the larger facility are well-advanced. OZ Minerals has a further debt facility currently drawn to A$86 million for which there is no current need to seek an extension.
Separately, the Company will reduce the size of its Board from 11 to 8, in line with the indication provided at the Oxiana Extraordinary General Meeting in July 2008. Messrs. Peter Cassidy, Owen Hegarty and Richard Knight will retire from the OZ Minerals Board before the Company’s next Annual General Meeting.
OZ Minerals’ Chairman, Mr Barry Cusack said “I stated at the Company’s Extraordinary General Meeting in July this year that I felt that 11 directors was too large a Board for the Company going forward, but that we needed the expertise and experience of all our directors until the process of integrating Oxiana and Zinifex to form OZ Minerals had been completed”.
“The formal part of the integration was signed off by the Board yesterday, making it appropriate for us to proceed to the next step of bringing the number of directors on the OZ Minerals Board into line with the ongoing needs of the Company”, noted Mr. Cusack.
“Each of the three retiring directors have given excellent service to OZ Minerals since its formation and to either Oxiana or Zinifex (or, in the case of Peter Cassidy, to both Oxiana and Zinifex) prior to the merger, and I thank them, both on behalf of shareholders and their fellow directors for their contribution”, Mr. Cusack concluded.
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