New Mandala

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• 1 Andrew Walker // Jun 11, 2009 at 6:18 pm

  A reader has sent me the following article from crikey.com

  Oxiana-Zinifex-Oz Minerals kerfuffle shows up inpendent experts

  11 June 2009 Adam Schwab writes:

  The “independent expert report” is quite possible the greatest anachronism in modern finance and corporate governance. The notion of a third party passing judgment on the merits of a corporate transaction in a very short time is itself dubious — that the third party is paid by the very corporation it is assessing is utterly absurd.

  It is virtually unheard of for an independent expert to provide an opinion on the merits of a transaction which differs from that of the recommendation of the board which is paying its multi-million dollar fee. Cynics would suggest that an independent expert who provides a view in contrast to management wishes may find themselves preparing very few independent expert’s reports in the future.

  The superfluousness of the process has been neatly proved in the disaster which is Oxiana-Zinifex-Oz Minerals.

  Grant Samuel (which is generally considered the leading “expert” in Australia) provided an expert’s report for Zinifex in its scheme of arrangement with Oxiana in May 2008. Grant Samuel was paid $1.5 million for the report (which was ostensibly prepared for Zinifex as the company conducting the scheme of arrangement). Using a discounted cash-flow model, Grant Samuel determined that Zinifex was worth between $6.1 and $6.9 billion, while Oxiana’s net assets were valued at between $5.9 billion and $6.7 billion.

  The key to determining an accurate valuation for mining assets is correctly forecasting the movement in commodity prices — in this regard, Grant Samuel (like many others it should be said), failed to forecast the slump in metals prices. For example, Grant Samuel assumed that zinc prices would average US$1.00 to US$1.20 per pound while copper would average US$2.50 to US$3.25. Even after the recent commodity rebound, Zinc is trading at around US$0.72 per pound and copper at US$2.35 per pound. It was these incorrect assumptions which led to Grant Samuel’s “expert” opinion on the value of the merged entity being somewhat higher the subsequent market capitalisation of the merged entity.

  The Oxiana-Zinifex merger was an unmitigated disaster. The merged entity, flush with cash, embarked on a spending binge shortly before the global financial crisis took hold and commodities slumped (in addition to the woeful $888 million acquisition of Allegiance, Oz Minerals also saw fit to pay former Oxiana CEO, Owen Hegarty, an $8.35 million ex gratia payment). Oz Minerals was close to death until Chinese-owned Minmetals made an offer for a cash scheme of arrangement which valued Oz Minerals at $0.825 per share.

  While that proposal was rejected by Treasurer Wayne Swan on national interest grounds, Minmetals quickly launched a fresh offer worth US$1.2 billion cash for all of Oz Minerals’ assets except the Prominent Hill copper/gold mine, the Martabe gold project (which is being sold separately) and some other minor assets.

  Oz Minerals commissioned an independent expert’s report to assess Minmetals offer which was prepared by none other than Grant Samuel — the very same expert who previously over-stated future commodity prices the prior year. For its second report, Grant Samuel was paid a further $1.25 million.

  Perhaps unsurprisingly, Grant Samuel stated that while the consideration under the proposed deal “is below the full underlying value of the Sale Assets” it found that “on balance, shareholders are likely to be better off if the Proposal proceeds than if it does not. In Grant Samuel’s opinion, in the absence of a superior proposal, the Proposal is in the best interests of OZ Minerals shareholders”. (This view was again in accordance with the recommendation of the Oz Minerals board).

  As a post script, last night, Minmetals increased its offer to US$1.386 billion, at the bottom of Grant Samuel’s range. Oz Minerals shareholders vote on the deal today.

  In a sign of how times changed, on 5 May 2009, Grant Samuel valued the assets to be acquired by Minmetals at between US$1.385 billion and US$1.6 billion. On 6 May 2008, less than a year earlier, that very same expert deemed those very same assets to be worth between US$5.9 billion and US$6.6 billion.

  While no doubt, commodity prices fell in the past year — as an expert, Grant Samuel’s role was to correctly determine those future commodity prices and the impact on the value of the underlying assets. In that regard, Grant Samuel, like most others, was unsuccessful.

  With the exception of perhaps Warren Buffett, Charlie Munger or Jim Rogers, very few mortals are able to correctly determine the intrinsic value of companies with any sort of accuracy. To demand a report be prepared by a conflicted third party effectively seeking to determine the value of a company in a very limited time is a complete waste of shareholders’ money.

• 2 rhaponticum // Jul 21, 2009 at 6:54 pm

  It is really quite astonishing to me that so little has appeared in even the New Mandala concerning this matter which not only directly affects Lao PDR’s single biggest source of exports, biggest private employer and biggest single tax payer but also places the Sepon Mine – located at one of the three most strategic places on the Lao-Vietnam border – in the hands of a PRC government owned company.

  The implications of this last point deserve a whole MA thesis (at least) on their own. Given the history of Vietnam/China relations (whichever form of politics either has practiced) and given the nature of Viet-Lao relations (fraternal delegations arrive every other day in Vientiane) one would imagine that Hanoi is far from comfortable with this deal. If Wayne Swann could throw out the original deal over security concerns at the former testing station for nuclear powered wombats, the mind boggles at what sort of messages passed between Hanoi and Vientiane over control of the Xepon Gap area.

  However, whatever strains it might have created for Vientiane in that regard, the deal did at least ensure that the Lao PDR got its due taxes from the mine – something the potential bankruptcy of the mining group to which the (profitable) Sepon Mine belonged – it would have otherwise missed out on. For much of the period July 2008 to June 2009, the ludicrous situation had arisen whereby a mine in one of the poorest Asian countries was effectively subsidising failing mines in Australia and yet all the decisions regarding the fate of the group as a whole were being taken in Canberra and Melbourne without reference to the interests of Laos.

• 3 rhaponticum // Jul 21, 2009 at 7:09 pm

  Sorry – a further comment. AW noted that ‘the banks are running out of patience’. No, I don’t think that’s true: once they realised what a total mess their fellow wan….sorry, bankers had made of the world economy, all of a sudden their triple-bottom line talk (which I always thought appropriate anyway for people with such large and flabby posteriors) went out the window; there was no longer any consideration of environmental performances or sustainable community investment by Sepon (or any other mine). Suddenly there was only one thing that mattered: give us the money NOW. The banks, it turned out had no patience whatsoever and once saved from their own follies by public subsidies immediately turned round and screwed everyone else, including miners. OZ Minerals at the time may not have been the most wise or best-managed of companies, but the role of the banks in its difficulties (which included that set of dopes in France whose level of prudence was demonstrated when one of their junior traders almost did a Gleason on them last year) was dripping with cowardice.

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