With the Australian mining industry particularly hard-hit by the international financial downturn, one enterprising Chinese business has managed to provide a lifeline for one ailing Perth-based metal mining company, whilst also establishing a bargain basement foothold in this hugely lucrative market.

The deal came as Perilya Limited, a 22-year old base metal mining company, saw its market value slashed from $1billion in 2007 to a low of just $18 million when it announced its intention to seek new funding. Its value eventually rallied to $30 million, but, despite a raft of cutbacks and lay-offs, its future looked far from certain.

Australian acquisition proves rich seam for SZLN

Zhang Shuijian: "seeking additional foreign partners".

Shenzhen Zhongjin Lingnan Nonfemet Co (SZLN), a Shenzen-headquartered State-owned mining business took the opportunity. Realizing the potential of the struggling Australian company, SZLN invested A$ 45 million (200 million yuan) into Perilya last February and acquired a 50.1 percent stake in the business. The deal marked the first time a Chinese metal company had acquired a controlling stake in an Australian mining business.

Following the acquisition, SZLN is now China's largest zinc-lead producer. The company's president, Zhang Shuijian, sees the takeover as a hugely significant for SZLN and its "going global" initiative.

Zhang is very much looking to the future with his company's new acquisition. In 2010 and 2012 Perilya's existing contracts with Nystar and Korean Zinc, respectively, expire. SZLN's controlling stake in the business will then see it entitled to bid for up to 50 percent of the Australian miners lead and zinc production. This will be a huge boost to the SZLN's annual output.

In 2008, SZLN produced 120 kilotons (kt) of refined lead and 239 kt of zinc. It also boasted a lead and zinc mining and dressing capacity of 180 kilotons per annum (ktpa) and a smelting capacity of 400 ktpa.

By contrast, Perilya had a turnover of 3.2 megatons (mt) of lead and zinc resources and a lead and zinc production capacity of 150 ktpa. Perilya also owns a lead-zinc-silver mine in the Broken Hill region of New South Wales, a high-grade zinc silicate oxide mine in Flinders in South Australia, and a copper-cobalt mine in Queensland.

Recipe for takeover

Zhang seems quietly confident as to the benefits of the deal, as he sits in his plush 26th floor office, looking out over a panoramic view of Shenzen's newly-developed Terra Business District.

Addressing himself to the timing of the deal, he says: "The financial crisis has proved a good time to acquire overseas assets. With the whole world in a perilous financial condition, substantial deals can be done at very low costs."

Prior to the deal, Perilya had already restructured and managed to substantially slow down the cash burn at its mining operations, however the company was still struggling to stay afloat amid depressed metals prices and unfavorable sales contracts.

In line with its cost-cutting plan, unveiled in August 2008, Perilya slashed its workforce from 760 to 320, mothballed two of its operations and virtually halved ore production to just 950,000 tonnes a year.

Perilya's managing director, Paul Arndt, convinced the Perilya Board to axe a proposed merger deal and actively began to seek partners to inject cash and prevent the mining group from going under. Speaking late last year, when the company faced its darkest hour, Amdlt said: "There are two scenarios, we either make this plan succeed or we stop operating."

Australian acquisition proves rich seam for SZLN

On February 5, Zhongjin Lingnan subscribed to a total of about 198 million of Perilya's common shares at A$0.23 each, via its wholly-owned Hong King subsidiary. Perilya's share price has now more than doubled to close at A$0.35 as of yesterday, up from a low of A$0.13 in November last year.

Zhang says: "If we were bidding now, we'd have to spend five times as much as we did in order to secure the deal."

Zhang's acumen was endorsed by Li Zuiyang, a metal analyst with CITIC securities. Writing in a report published in March of this year, Li said: "It [the Perilya acquisition] was the smartest deal with the most favorable price of any Australian resource acquisition by a Chinese mining company over the last two years."

Li is not the only analyst to applaud SZLN's initiative. Hong Jinyang, an analyst with Goldman Gaohua Securities, said: "The decision comes at an important time, with Australian mining observers and participants expecting more Chinese investments as the nation's vast mineral reserves enter a period of depressed prices, where many mining companies are struggling to survive."

Compared with Chinalco's ultimately-doomed months-long marathon wrangling over its proposed Rio Tinto deal, Zhang attributed SZLN's successful takeover of Perilya to both the company's quick reaction, and the efficiency with which both sides negotiated and ensured they received the necessary approvals.

Outlining the brevity of the process, Yu Zhongmin, manager of the president's office of SZLN, said: "From the very first day the two companies met, until the deal was finalized, it only took 80 days to arrange the acquisition, including obtaining the requisite approvals from the two countries' governments, as well as arranging the necessary shareholder meeting. What is even more remarkable is that this short period also included downtime during both the Christmas holiday and China's Spring Festival."

This high level of efficiency also applied to SZLN's senior staff. Despite only having 40 members of staff working in its headquarters, the company managed to rapidly process the deal whilst still maintaining tdaily operation of its 10 billion yuan's worth of assets.

Perilya: a new era

After the merger, Arndt said in Perilya's first quarter statement: "The three months ending March 31 represented a transition to a new era for Perilya, with the introduction of a new major shareholder in the form of Zhongjin Lingnan.

"The benefits of the relationship are already being demonstrated with the establishment of more strongly priced markets for zinc silicate as a result of SZLN's business relationships in China and the opportunity for Perilya to take a positive outlook at investment opportunities.

"At our core operation at Broken Hill, we saw a continued improvement in operating performance with our cash costs moving below $ 60 c / Ib of payable zinc for every month in the quarter. Our physical production also exceeded the planned amount."

The statement also confirmed the company's ongoing reduction in cash costs during the quarter as a continuing trend from month to month, culminating in cash costs for the month of March of $ 52 c/Ib. This has resulted in the company returning an unaudited operating profit for the month of March.

For Perilya's iconic Broken Hill mine, one of the world's largest and most renowned zinc, lead and silver mines, its quarterly combined metal production of 29,800 tonnes of contained zinc and lead exceeded its targets and represented a production increase of 15.5 percent over the previous quarter.

It also showed an increase in the grade of its milled zinc and lead ore, with an average combined grade for the quarter of 10.4 percent, a 35 percent increase over the previous quarter.

Australian acquisition proves rich seam for SZLN
(China Daily 07/07/2009 page15)