KGB INTERROGATION: Andrew Michelmore

Just weeks before Zinifex and Oxiana shareholders vote on a merger between the companies, Zinifex chief executive Andrew Michelmore talks about the benefits of the deal and why the Myers-Briggs personality test is good for assessing mining executives.

Alan Kohler: Andrew, welcome to the KGB Interrogation. Since your bid for Oxiana was announced in early March, the zinc price is down 35 per cent, lead’s down 40 per cent, while copper on the other hand has fallen about 9 per cent. As a result of all this, Oxiana’s shareholders are now getting very restless. Isn’t it fair to say that the bid’s in trouble?

Andrew Michelmore: No, I wouldn’t say the bid’s in trouble. We always made it clear that it was for the long term benefits of the shareholders that we’re putting these two companies together, and it was to cover exactly these sorts of situations. At the moment we’re seeing tight copper supply but as projected and a surplus in zinc, particularly this year and next year. But there are two parts to that. Firstly, it’s nowhere as much in surplus as was originally projected and secondly, everyone agrees it gets very tight from 2011 onwards. That’s why we say we want the right portfolio – a diversified portfolio with a breadth of minerals.

AK: But the value balance has clearly shifted towards Zinifex now. As we speak today, it’s very much more in favour of Zinifex shareholders than Oxiana, isn’t it?

AM: I think you can argue that in the short term, but when you look at the upside you would say actually there’s more upside in the Zinifex value than there is in the Oxiana. And that’s exactly the issue we went through when we had the discussions about how to value the relativities. From very small changes in relative performance between the copper and the zinc prices you can flip the balance from one side of 50/50 to the other side of 50/50 and that’s exactly what we’re seeing at the moment.

Robert Gottliebsen: Why is there more upside for Zinifex? What do you expect to happen to Zinifex that would transform it?

AM: Certainly the prices of zinc and lead will increase within two years. In fact, a number of commentators, whether you take Jim Lennon out of Macquarie, whether you take Don Lindsay at Teck Cominco, there’s quite a few people who understand that industry with projections of it turning around by the end of this year. So that’s why the upside is in the value of the Zinifex side of it.

Conversely, on the Oxiana side you have the arguments that we’ve heard and we’ve taken into account in our discussions that Prominent Hill [Oxiana’s copper and gold project] comes on board later this year and that you’re not getting the full value of Prominent Hill in the valuation. Similarly on the Zinifex side, we’ve got the Avebury nickel project coming on board in the second half of this year and that’s not included in the value of the Zinifex.

So there’s lots of pluses and minuses, but it depends on what your projections are going forward and particularly relativities of price changes.

AK: Are you vulnerable now to somebody else coming in and making a bid for Oxiana?

AM: You can never say never, but as you get closer to the date I think it makes it less likely. I would say if anything we believe the combined company is actually an even more attractive entity for anyone who would be looking at either of us and they would probably wait till both companies have merged together. That’s why our view is yep, it is a much better company with the two of us together. Gives us a lot more options to grow the business and do things that we couldn’t otherwise do. And that’s exactly what we’re going to do. We’re going to get on with running the business.

Stephen Bartholomeusz: Andrew, there’s only a week or so to go to the shareholder meeting on June 16. There’s been no sign of anything in the market, anything untoward happening. You referred a moment ago to the potential for something to happen after. Are you anticipating anything happening quickly?

AM: Look, we haven’t seen anything but I would expect everyone to be running their ruler over it. We put out the Scheme booklet. All the information’s in the marketplace. They have now got a lot more information on which to do their calculations but we’re certainly not seeing anything at this stage. We’re not seeing any rumours. The spread between the two companies in the market, I think it was about 2½ per cent last night, we’re just not seeing any movement in any direction.

But what happens afterwards, again, I think most people in the market at the moment are very easily spooked and there’s also the tightness in the credit side of the market. I think there’s a whole pile of factors that says that people will probably wait, but you never know.

SB: You’ll have a market capitalisation of somewhere approaching $10 billion. More specifically, you’ll have well over a billion dollars of cash post-merger. Is there pressure on you to get that cash out quickly before it makes you vulnerable?

AM: The boards have always earmarked the cash for us to do two things. One is to underwrite the development programme, the organic growth within the company. But certainly we’ve said that cash is for reinvestment in the total business and we will be looking at, or we are at the moment looking at a number of opportunities. But we have to make sure we get that balance right between continuing as the two companies have been – nimble and agile in their actions and decision making but also with the rigour of really saying ‘does this add value for shareholders?’ We’re not going to grow for just growth’s sake and we’re not going to go and spend that cash just for the sake of getting it off the books. It’s got to really add value.

AK: Andrew my number one pick for your first takeover is Western Areas NL. What do you think of that?

AM: Very interesting. Certainly we’re interested in nickel sulphides and there's been some pretty impressive drill results. There are a number of nickel opportunities. We do like nickel sulphides but again, you’ve got to be able to add value. I think a lot of parties have gone out and said ‘oh well, look at these nickel opportunities’. They’re obviously going to have a go at those and we’ve seen the prices go up, but when they go past the reasonable value, you’d actually be destroying value for our shareholders. We’re not going to look at them.

AK: Western Areas have come down in fact.

AM: Yeah, it’s a matter of the total value when you look at the them. Some of them have been incredibly hyped and it’s been a very easy decision. What we tend to do is have a look at ones that we would like and we will put a valuation on them and we’ll then have a watching brief and wait for when they get into a certain range that makes sense to go and have a discussion.

AK: How many stocks are on your list?

AM: We try and put a filter on to make sure that we’re not running a shotgun approach and so we focus on probably half a dozen. But we would have a number in the background that we’ve looked at before and put on the shelf, saying ‘here are the parameters under which we would pull that back off the shelf.’

AK: How many of those have you sounded out, if any?

AM: I wouldn’t want to give any information on that.

SB: Apart from nickel, is there any other metal that you think you need in the portfolio?

AM: Oh, we like the current portfolio: nickel, copper, lead zinc. In fact, lead zinc is short 2011 and on, so it’s very interesting where that material going to come out of the ground around the world. We would still like to have a good portfolio in that commodity, but the silver/gold is very important. PGM (platinum group metals) is very important, but I think one of the issues there is the bulk of those minerals are London Metals Exchange-based and you get very significant fluctuations in those markets and, dare I say, manipulation of those markets. There are very small tonnages going through the LME compared to the total world consumption and therefore huge swings around very small movements.

Again, to get a really diversified company we’d like to add some non-LME minerals into the portfolio, but again we’re just not going to race out there and grab anything we can get our hands on. It’s got to add value to our shareholders and we’ve got to be able to demonstrate we add value to that business as well.

RG: Andrew what do you think the company will look like in say three years time?

AM: I think we’ve projected it is a larger company. Certainly investing the cash we have on our books. We’ve got a number of projects coming through: Prominent Hill, Avesbury, we’ll have Dugald River [a zinc mine in Queensland], Martabe gold mine in Indonesia. We have some very interesting exploration work going on around the world.

So I think you’ll see probably at least one if not two acquisitions within the company, as well as those organic projects either in production or very close to production and maybe some different minerals in that mix and some good exploration success. We would project it to be, and in fact we want to be, a larger company. We just enter that mid tier diversified company range in the $10-25 billion market capitalisation, which disappeared with Inco, Falconbridge, Phelps Dodge, WMC and Noranda all disappearing. There’s a big gap there at the moment and we want to work our way through that gap.

SB: Will it be a more international company, Andrew? With Oxiana you pick up some expertise in operating offshore in difficult geographies and jurisdictions. Does that give you confidence to do more offshore?

AM: Absolutely. There’s a fantastic model that has been demonstrated there. You go and talk to the government, talk to the local communities, see how it’s operating. The standards that have been applied are fantastic and we’ll certainly look at other regions of the world.

RG: Do you think Owen Hegarty will stay around or get a bit frustrated?

AM: Look, I think that’s a question you should ask Owen. His enthusiasm is just infectious and he’s done a fantastic job. His connections and relationships with the different communities and governments are worth a lot and we certainly want to hang on to that for as long as Owen is able to provide it. So I think there’s a very important handover period that we’ll be going through and Owen and I will obviously work very closely through that.

SB: Owen is going to be chairman of the integration committee of the board for the next six months. Is there potential for friction there? A former CEO sitting next to the current CEO.

AM: Look, the standard rule is that the CEO needs to move on and doesn’t sit on the board, but I think there a couple of things here. One is recognising the value that Owen has brought in those relationships and we don’t want to lose it. But secondly, as I’ve seen over the last number of months travelling around with Owen around the world, the two of us get on extremely well. We enjoy coming up with different ideas and then discussing and debating them and it’s amazing how much we agree, so I don’t think there is a difference in the view of where we want to take the companies. In fact, I think that’s what helped bring the two together. We’re so aligned in our views about the market, the potential for the companies, the people and the opportunities.

AK: Do you think there’s any possibility that Oxiana shareholders will demand that Owen ends up in charge of the companies in order to make the deal work?

AM: I think that’s for the board to deal with. Obviously I’m on the receiving end of that, but there’s no sign of it and I think more importantly, Owen’s made it very clear that he’s moving on and he’s also made it very clear that he believes I’m the right guy to take it forward. And again, I think that’s why the merger has worked so well.

SB: Andrew, you spent a couple of years in Russia. There are attempts going on to merge Norilsk and Rusal. How significant could that merged entity become if the merger happens? And how would the Russians be different on the world stage to the conventional mining houses?

AM: I think it’s going to be a very serious vehicle. I know [Rusal chairman] Oleg Deripaska has had his view that he would like to build a BHP of the Northern Hemisphere and he has a fantastic base with Rusal and their massive hydro supply. Add Norilsk to it, which has the world’s largest nickel and palladium ore body with huge life and that’s a hell of a platform. That would be close to $100 billion and then you start adding other bits and looking outside. I think what they would add would be, based on the things I learnt with them, long-term strategic value of minerals in the ground. Looking for where they are and getting security of supply over them. They’ll be very agile and quick at picking them up when the opportunities are there and they’ll be incredibly tough in their negotiations. That’s what they’re very good at.

SB: Well, Russia is very resource rich. You’ve got experience there. Is there a potential for the merged Zinifex-Oxiana to do some work in Russia?

AM: I think there are plenty of opportunities outside Russia so it’s not that we have to go and work there. I think it’s where you can add value from your current operations – whether it’s your infrastructure, whether it’s your understanding of the area, whether it’s your relationships with the local communities. At this stage, apart from my knowing people and various companies in the region, I don’t think there’s anything that we would be adding value to by going in there.

SB: Doesn’t sound like you’re very enthusiastic about going back.

AM: Look, you certainly have to have local Russian partners to do it. It’s a bit like working in China. You need to work with the locals and you need to have locals that you’ve developed a long relationship with to make it work. I think that’s why you’d be mad just to jump in quickly and think you’re going to have a bonanza.

RG: Just going back, as almost CEO of WMC I saw you listening to Marius Kloppers’ speech at the Melbourne Mining Club and he was saying that Olympic Dam would be one of the world’s great mineral deposits. What did you think about that?

AM: I couldn’t but help agree and I think…

RG: WMC shareholders got done over, didn’t they?

AM: I think it’s again one of the things I’ve learnt being outside looking back in. At the time, WMC trying to get the market to see that the value of the uranium in Olympic dam was strategically, nationally, able to supply 30 per cent-plus of the world’s uranium for 70 to 100 years. How do you put a value on that and argue with the local institutions about putting in $20 and they’d only put in $15 at maximum into the valuation for uranium? The analysts wouldn’t look at the long term, they would only look at the short term and therefore end up with a very short term valuation. I think as Marius pointed out, look at the size, look at the life. Let’s take the time to set it up properly because it’s going to be there forever and that’s the difficulty of getting people who tend to look at the glass half full rather than glass half empty. Getting that view of it for the longer term, that’s exactly the issue we had with WMC. I think timing’s everything. If it had been six to 12 months later people would have seen the markets coming through and the numbers really being delivered in the market and would have had a totally different view on the valuation.

AK: Do you think BHP’s on course to get Rio Tinto?

AM: I think that’s a very difficult question. You can argue both ways and I think it’s going to be a long, grinding process and I think the biggest issue there is what does it do to the various teams working on it and the people within the company? The people make the difference in the companies and I saw that through WMC, where we were able to keep everyone focussed and enthused and determined to deliver value out of the company. But when that runs for years it eats away at you, and I think that’s the biggest challenge Tom has and he’s doing a fantastic job with it on the defence, keeping everyone enthusiastic and aligned. And on the other hand, Marius is pretty determined and he just relentlessly grinds away at it.

AK: Do you mean that if BHP gets Rio after 18 months of Rio resisting it then there could be a tremendous collapse in morale at the end if BHP gets it?

AM: I think it would have an impact, the uncertainty. Most of the people who work in the minerals industry tend to be either INTJ or ISTJ on the Myers Briggs [for an explanation of the Myers Briggs Type Indicator, see here] and the ‘J’ means that they don’t handle change and uncertainty well. They want certainty. They want process. They want planning. They want rigour. And so what happens is that you have to really keep them focussed on delivering things. But this uncertainty just keeps eating away at them and some of them just put their hands up and say ‘I just can’t work under this condition’. And I think that’s where it adds an extra load. As well as trying to run your current business and putting up some defence, you’ve got to keep working on really having your people in a great frame of mind to keep focussing on their jobs.

AK: What’s the Myers Briggs score of the people at Oxiana? Are they ‘J’s’ down there?

AM: I think there’s a balance of the J’s and you see that in some of the projects side. The delivery, the exploration, the normal group you get in there. But what you want in the business development side of it, you want to have the P’s in there that are out there looking outside the box and not being wedded to anything. And then you have the J’s in the CFO area and analysis area, who are very strict in their rigour and saying ‘no, that doesn’t add value’ or ‘yes, this would still add value’.

AK: Have you told them all who’s got what jobs now?

AM: The top team is named apart from the CFO. We have to have the CFO name pretty soon and we’re just coming out with the teams then underneath each of the executive committee members and a few of those notices have gone out. We aim to have those out either this week or early next week. We’re very keen for everyone to know exactly where they’re going to sit on day one and also as part of that process we’re doing the integration plan so that day one, we push the button. Everyone knows where they are, knows what we have to do and where we standardise things and we go chasing any benefits out of it.

AK: How many difficult exits are you having to manage?

AM: There have been a couple at the top level and very few at the next level. As we said, most of the businesses are complementary. Zinifex is short of certain areas and Oxiana’s short in other areas, so the two actually dovetail together very well. It’s as we go then down through the next layers that we may have some redundancies and that’s the process we’re going through at the moment.

SB: And have you chosen a new name for the merged company Andrew?

AM: That’s pretty close. We’ve had plenty of suggestions of names but actually to be able to register them and get a’s amazing how few are actually out there and a lot of people have locked in names. You come up with a name you think was absolutely appropriate here and then you look and there’s a German website with exactly what you want and it’s all in German. So it’s been quite an interesting process. The name will come out at the vote on June 16.

AK: Thank you very much Andrew.

Follow @AlanKohler on Twitter


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