Chinese SOE offers $1.7 billion for Oz Minerals

In the latest move by China to secure natural resources, China Minmetals Corporation has made an offer to buy Oz Minerals for an equity value of A$2.6 billion ($1.7 billion).

Minmetals is offering 82.5 Australian cents per share for all outstanding shares of Oz Minerals. The offer price represents a premium of 50% to the last traded price of Oz Minerals on November 27. The Australian firm has been suspended from trading since early December as it has been trying to restructure its debt.

Oz Minerals will still try to sell some agreed assets -- the Martabe gold and silver project in Indonesia and the Golden Grove polymetallic mine in Western Australia -- to raise interim funding. Minmetals will increase its offer price if Oz Minerals realises above an agreed amount for the said assets.

Melbourne-headquartered Oz Minerals is the world's second largest producer of zinc and a substantial producer of copper, lead, gold and silver. It was formed in 2008 through a merger of Oxiana and Zinifex. Its mining operations are in Australia and Asia and it also has early stage exploration projects in the Americas. For the six months ended June 30, 2008, Oz Minerals registered revenues of A$1 billion on which it achieved an Ebitda of A$332.5 million. But after accounting for one-off items related mostly to write-downs, Oz Minerals posted a net loss of A$432.4 million.

Oz Minerals has A$1.2 billion of debt which is due to be refinanced by February 27. It will now seek an extension of this deadline from its existing lenders to enable the deal with Minmetals to go through. Minmetals has made the interim support of Oz Minerals' lenders a condition for the deal.

If Minmetals is successful in acquiring 100% of Oz Minerals' outstanding equity, it intends to repay all the company's debt and allow early redemption of a convertible bond.

Oz Minerals said on a media call that Minmetals was the only bidder willing to take over Oz Minerals in its entirety.

State-owned China Minmetals is China's largest importer of copper with revenues of $21 billion. It recently acquired a 60% interest in a copper mine in Peru. It also has interests in aluminium, tungsten, antimony and zinc.

The deal is subject to due diligence which has to be completed in one week; receipt of approval by the Foreign Investment and Review Board (FIRB); and other customary approvals both in Australia and China.

Minmetals is being advised by UBS. Oz Minerals is being advised by Caliburn Partnership and Goldman Sachs JBWere.

The deal comes only days after another Chinese SOE, Aluminum Corporation of China (Chinalco), agreed to invest $19.5 billion in Australian diversified metals and mining company Rio Tinto through direct equity and joint ventures. Like Oz Minerals, Rio Tinto is struggling to service its debt burden.

Both deals have yet to receive the blessing of the Australian regulator, the FIRB. And with analysts and media criticising the Australian government for allowing Chinese SOEs to acquire natural resources companies whose balance sheets are under stress due to falling commodity prices, the approvals are by no means just procedural. The deals are likely to face intense scrutiny.

However, the options for both these firms and others facing a similar plight are limited. In the case of Oz Minerals, it seems that after running a sell-side process, Minmetals is the only saviour available for the firm. The government could decide to step in and provide bailout packages, or force local lenders -- which are already facing their own balance sheet issues -- to take a lenient view on the credit they have extended to these firms. But barring such non-commercial options, choices are few. Australia may just have to come round to the fact that in a capital-starved global economy, those with capital -- like China -- are in the driver's seat.