UPDATE: Sons Of Gwalia In Administration On Hedging Debt
By Stephen Bell
OF DOW JONES NEWSWIRES
PERTH (Dow Jones)--Sons of Gwalia Ltd. (SGW.AU), Australia's second-biggest gold producer, has fallen into administration over a A$348 million hedge book liability.
The Perth-based company said Monday that it appointed voluntary administrators over the weekend after identifying a "serious deterioration" in the status of its gold reserves.
In Australia, going into administration gives an insolvent or near-insolvent company breathing space to deal with its financial difficulties. The administrator investigates the company's affairs and gives creditors
information to decide whether the company should be allowed to keep trading or wind up.
Sons of Gwalia's gold counterparties - nine banks and financial institutions - refused to accept a standstill agreement on the hedging debt.
Hedging, which is a form of risk management used by companies to reduce the chance of a loss from price movements, includes tools such as forward selling and options.
Citigroup Inc. (C) is understood to be the company's biggest hedging counterparty, with an exposure of between A$100 million and A$150 million.
Other counterparties include: BankWest, a unit of HBOS Plc (HBOS.LN); Goldman Sachs Group Inc. (GS); JP Morgan (JPM); Dresdner Bank AG (DRB.YY); Commonwealth Bank of Australia (CBA.AU); Australia & New Zealand Banking Group Ltd. (ANZ) and HSBC Holdings Plc (HBC).
As of June 30, Sons of Gwalia's 3.1 million-ounce gold hedge book had a negative mark-to-market value of A$348 million. It also had currency hedges that were A$75 million in the red.
Sons of Gwalia also owes US$170 million to U.S. pension funds, following a private note placement in 2000 arranged by JP Morgan.
The administration move has caught out some big North American companies, including long-term shareholders Teck Cominco (TEK.A.T) of Canada and U.S.-based Cabot Corp. (CBT).
California-based Franklin Resources Inc. (BEN) has been a major buyer of Sons of Gwalia shares in recent months, boosting its holding to 20.7 million shares or 11% of the company.
Analysts estimate that Franklin has invested more than A$50 million in Sons of Gwalia since it started buying shares in early 2003.
May Recapitalize Tantalum Business
The administration move surprised analysts, who expected the company to alleviate its financial problems via a strategic review that was due to finish this week.
Some analysts had expected the company to book a A$350 million writedown of its gold assets, and potentially close its Tarmoola gold mine north of Kalgoorlie.
But a loss of gold reserves uncovered during the review caused a breach of hedging covenants, making it uncertain whether Sons of Gwalia could meet its commitments.
The administrators - three partners at Ferrier Hodgson - will work with directors to develop a plan focused on selling the gold business and recapitalizing the tantalum business, the company said in a statement.
As well as being Australia's second-biggest gold producer behind Newcrest Mining Ltd. (NCM.AU), Sons of Gwalia is also the world's single biggest producer of tantalum, a metal used in cell phones.
Sons of Gwalia Chief Executive John Leevers said that several local and offshore parties had expressed an interest in buying the gold division in recent months.
"We're aware that there are people interested, but there have been no discussions yet," he told Dow Jones Newswires in an interview.
Leevers said that the out-of-the-money hedge book will make the proposed gold division disposal more difficult.
"The sale was never going to be easy as the hedge book is a significant liability," he said.
Leevers said that it is "very much business as usual" as directors and the administrator work on the restructuring proposals.
A former Pioneer International Group executive, Leevers took over management early this year from founding directors Peter and Chris Lalor, who have since left the company.
Creditors will decide the company's future at meetings to be held within a month.
Some analysts are skeptical of the group's plan to trade out of its difficulties by retaining tantalum and selling the gold mines.
"It is difficult to see a buyer for the gold business with the current hedge book in place," said Hayden Bairstow, an analyst at Patersons Securities.
"There is more inherent value in the tantalum business, and in our view it would make an easier trade sale," Bairstow said.
Patersons doesn't attribute any value to Sons of Gwalia's Tarmoola and Gwalia Deeps gold assets, leaving a valuation of around A$120 million for the remaining gold mines.
Founded in the early 1980s, Sons of Gwalia became a pioneer in the use of hedging to protect its gold revenue.
A merger in the late 1990s added tantalum to the company's mix.
This saw Sons of Gwalia become a market darling during the technology boom of 2000-01 when its shares peaked at nearly A$10 each. Its shares last traded Friday at A$1.30, compared with their 12-month high of A$3.99.
Demand for tantalum plummeted after the dot com crash, just as the company tried to absorb its PacMin Mining gold acquisition of 2001.
Some of the PacMin assets, including Tarmoola mine, proved disappointing.
Operating costs rose, but the company was pressured by the need to maintain production to meet its hedging commitments.
Problems surfaced in 2002 when Sons of Gwalia started cutting profits and dividends.
The problems worsened this year, with the gold and tantalum miner's shares halving in value since July 14 when it unveiled a profit downgrade.
Sons of Gwalia sold around 2.1 million pounds of tantalum in fiscal 2004.
The company produced 521,000 ounces of gold from its Western Australian mines in the same period.
By Stephen Bell, Dow Jones Newswires; 61-8-9245-6408; sgbell@bigpond.com
-Edited by Melanie Botts
(END) Dow Jones Newswires
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