many example of negotiated settlement with bondholders cents on the dollar on the web, see underline here, will look for others

Interview with Peter Johnston

Reporter Ticky Fullerton interviews Peter Johnston, the CEO of Anaconda.

Peter Johnston what sort of position was Anaconda in when you came on board?

In December it was a very tough financial position. What stood out quite clearly that the company had a very poor balance sheet, negative cashflow and we were struggling to make ends meet.

Did you realise how bad a position I suppose it was before you got there?

I always knew of course, I followed the company for many years and I always knew it was in a poor financial state, whenever you joint a company it's always a little bit more enlightening when you understand the depth.

You describe the earlier half year results, the 457 million I think as clearing the decks, was it more aggressive than that?

Not at all. The company was in a parlous financial state cleaning up the balance sheet was long overdue and of course we cleared that with the board and our auditors as well and that was just what you had to do to get a reality check on this company. We had been liven living well beyond our means.

It's not unusual though for incoming management quite within accounting standards to hack results back so that a turnaround under them will look much more impressive.

Oh sure but we have never made a profit so there was no question of a turnaround and this was just cleaning out a lot of the non-performing assets that we had accumulated and focussing back in on Murrin Murrin which was the new strategic direction we had established.

That's very much a new strategic direction because what was the previous direction?

The previous direction was growth in a a whole range of areas but particularly in nickel but also in a whole lot of other areas for example pipelines, magnesium plants, fertiliser plants, what we decided very early on that we had to get our bread and butter right which was really focussed on the performance of the Murrin Murrin operation and that strategic direction was imperative for the survival of the company.

Now what about the most recent results that have just been announced, what are you producing now and what's your cashflow position?

We've been cash positive in an operating sense since March, the last quarter produced 8,000 tonnes of nickel and 500 tonnes of cobalt, that's approximately 70 plus percent of design capacity and for the quarter we were cash positive in the tune of $11 million so we now have a reasonable financial base pre-financing.

Do you think that it's going to be a while before you get to 100% efficiency capacity?

We've got a capital program under way. It'll take another 12 months to complete, once that's complete we're targeting 90% of production by approximately June next year but we must spend, we must be patient, this is a large hydrometallurgical plant and it's complex in technology and we must spend the capital to correct a lot of the technical issues. The program's underway, we're very confident now of the technical viability of the plant but we must spend the capital to correct the deficiencies.

I'm right in thinking am I that we've got revenues coming into Anaconda now for the last quarter of 70 million?

That's correct.

Now interest on the debt is how much a quarter?

Well a quarter, a half yearly it's 32 million that's just the bond holder debt, then we have the the four X counter parties, which are the, well they have different hedge positions closing out at different periods of time so it's approximately another 10 million, so we we have to fund a minimum of 40 million a half in interest on our secured debt.

For those who look at these numbers and say well 70 million revenues, 20 million a quarter to pay off debts, I mean this isn't such a bad news story is it?

Well I mean when you say revenue, you must take the operating costs off that first, so the operative cost must also come off your revenue so you must use the net figure.

Your working capital this quarter was 49 which is quite high, was that unusual for the quarter?

Well we are spending a lot of capital in the plant to correct the deficiencies but our you know the total cashflow which is the true measure of performance was a 11 million dollars for the quarter. So you can see if we had to fund the pre-financing we would still be well under water in our debt capacity.

Andrew Forrest maintains that the company has always been able to pay its debts, even when it wasn't cashflow positive.

The reality of the situation since I joined the company, there was nothing left in the cupboard in December, we looked at all the options in January February, it became quite clear we could not fund our debt capacity at the end of March when the debt service reserve accounts needed to be topped up, there were no other avenues of raising revenue, for example by a rights issue and we had to go to the bond holders and say that we could not meet that requirement under their debt covenants and that's the reality of the situation that we found.

Did you absolutely have to go into default, was there no other way around it?

Well there were no other capital alternatives that we could find. We had certainly checked all other options and found that particularly in a capital raising sense, the door had truly closed on us.

Andrew Forrest suggests that it would have been possible to go back to the bond holders and ask for an interest rate holiday of 2 to 3 years and that they might have been willing given the ramping up is now near completion, they might have been willing to buy that.

Well again the reality of the situation is they weren't.

Do you think he could have done it with his magic?

You'll have to ask Andrew. I should also add of course debt is what got this company into problem, into the current situation.

After the recapitalisation that will happen after your bond holder negotiations, there's talk around the market of the bond holders accepting something like 25 cents in the dollar plus the Fluor Daniel upside, whatever that is, once it's recapitalised, Anaconda could be sitting on a gold mine as well as a nickel mine couldn't it?

Well we don't mine gold. The situation in this company if we can do a deal with the bond holders that will relieve a lot of the pressure on the debt. Once we went into default on our covenants, on our loans they own the Fluor Daniel litigation, that is just considered an asset of the company. Now looking forward if we eliminate the debt and recapitalise which will require some underwriting, this company has a real future. But it will take a long time to get the plant up to full operation capacity and of course the second real issue with nickel is it's revenue is always extremely volatile because of the variable price of the product we produce. But yes it will I believe under the new management there is a real future.

What do you say to some of the criticisms that you're now saying there is a real future and yet the company has over the last few months been consistently talking down the share price, talking doom and gloom when actually the nickel price looks like it's going quite well, Fluor Daniel negotiations look as though they're going to bring in money to the company.

Well let's take it one at a time, Fluor Daniel negotiation will not bring any money to the company. The Fleur Daniel settlement belongs to the bond holders. Now we are trying to negotiate some of that money back and a very modest amount only for participation in the litigation. We have never been negative about the company, what we have called we had to be open and transparent and we all we have ever done is be realistic about the future of the company. Real and transparent is what we have consistently stated our position.

What is your response to this ASAG letter that's been been flying around and the accusations that management have been negative, possibly with an agenda on behalf of major shareholders?

Well it's not surprise, but we do have two fundamental tenants that we do look after all shareholders, there has been absolutely no evidence or no favouring of minorities or majorities. We as a company it's our duty to look after all shareholders and that's what we've done, as had the board. We have had overwhelming support from a lot of other shareholders who have been pleased with the openness and transparency that the company now operates under and we will not resile from that. We put everything out in the market to ensure the market is fully informed.

Is anybody other than Glencore going to be interested in underwriting this rights issue?

We of course would like a lot of parties to be interested, however we think the field is fairly narrow but we do have other major shareholders and we are still talking to those shareholders. No underwriting deal will be consummated until they know the outcome of the debt restructure.

And are the Glen Murran bonds borrowed at the same time to to fund Murrin Murrin being negotiated as part of the overall negotiations?

Ah yes they are. They're in parallel, separate but parallel negotiations.

I mean you can see where I'm going with this can't you, we've got Glencore now with obviously a lot of different interest in the company, it's got an interest in Anaconda, it's got a direct interest in Murrin Murrin, it's got a marketing agreement, it's got a loan to the company and it's got a claim over some of the the hedging, what do you say to once again those ASAG people who say that this is actually all about Glencore getting hold of Anaconda without paying the proper takeover premium.

Glencore like all shareholders have lost a lot of money in this company, more than anybody else. They were an original founding partner in the joint venture and I think they have continued to support this company when others may have withdrawn.

They'll lose less money if their Glen Murran bonds are written off substantially?

Well they've already lost a lot of money in this company and I have great sympathy for all our shareholders who have lost and suffered under the shareholding arrangements they've had.

Course one way they could get a lot of that money back would be if they did end up owning Anaconda and they could get a hold of a huge amount of tax losses which are sitting in the company at the moment.

Tax losses are only possible used if you generate profit, at the moment we've never generated a profit so that's a hypothetical question for the future.

But if the company was owned by a profitable company taken over by a profitable company, those tax losses would be very valuable.

Ah it may be depending on the circumstances of the company and that would apply to any company.

What are the tax losses sitting in Anaconda at the moment?

They're approximately, oh they're a little over 1 billion dollars.

So there's a lot of upside if someone could get their hands on

Only in particular circumstances where you can, you must be able to utilise the tax losses so it's never just a clean equation.

One of the issues that's come to our notice is about the Anaconda marketing agreement now in 2000 Anaconda sent a letter terminating that marketing agreement alleging that Glencore were retaining secret profits on sales, do you know about this and what do you make of it?

I'm aware that agreement was terminated, I don't know the details of any of that debate that went on, the only agreement I'm aware of now is the current agreement put in place in January and that's another example of Glencore supporting the company because we needed cash, we done a quite a strong commercial deal in a marketing sense that they do market the nickel for the company but also pick up the logistics and the transport and that deal enabled us to get through to survive through January February. So it was an excellent commercial deal for Anaconda, now I can't talk about the past but going forward that's been also a strength of the company that we can market our products now worldwide with now impediments.

But if I could show you a letter from the past which actually has accusations by previous Anaconda management saying that Glencore were retaining secret profits on those sales, would you be a bit worried about your current agreement?

Well I can only say we negotiated the current agreement. There is sound commercial terms. It was approved by the board and open and above and completely transparent. One of the problems we had in this company in the past, there are a lot of legacies, we're about trying to move forward.

So you trust Glencore?

Oh absolutely, they've been a great supporter of the company over many years.

Should small shareholders be taking up their rights...

Ah I believe so. It will be a renounceable rights issue if we go down that path and we will be campaigning quite strongly for all shareholders to follow their rights.