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Miners talk merger

Friday, 22nd February, 2008

Line of lode neighbours and one time rivals Perilya and CBH Resources have confirmed they are discussing a possible merger. In an announcement to the Australian Stock Exchange yesterday, Perilya confirmed "discussion regarding a potential merger" with CBH had taken place. "These discussions are incomplete and have been expressed to be confidential," the company said in a statement. "No formal agreement has been reached, nor is such an agreement imminent or inevitable." The announcement ends weeks of speculation that Perilya, which earlier this month announced it was reviewing its operations, was closing in on a deal. The company said it was "actively seeking growth opportunities through mergers and acquisitions" as part of the review.

Yesterday, Perilya said the formal announcement of any "binding transaction" between itself and CBH would only be made once commercial terms were agreed and transaction documents had been signed. "Perilya continues to evaluated a variety of organic and strategic initiatives to add value to its business and create shareholder value." CBH Resources also issued a statement to the ASX yesterday "The company confirms that confidential discussions have been and are ongoing with Perilya regarding a possible corporate transaction which centres on maximising the value of the respective groups' Broken Hill operations. "These discussions are incomplete and, if and when any agreement is reached, the market will be advised." If it went ahead, the merger would make mining history, as it would be the first time the entire area known famously as the line of lode was owned by a single mining company.

It would also come at a time when CBH, which also owns the Endeavour Mine in Cobar, is close to accessing the upper part of the Western Mineralisation orebody. The company in its half yearly report said that the decline access to the orebody had advanced 1,400 metres and was on schedule and budget. It said environmental approvals for construction of the mill and surface facilities were currently being sought, and could take a further six months. A merger with Perilya could result in big capital savings at Rasp. Ore from CML7 could be railed to existing facilities at Perilya's southern operations for processing. The merged companies and one time rivals would also benefit from economies of scale in any future mining developments along the 3.8 kilometres-long line of lode.

"There are aspects about the merger that make sense," Ord Minnett analyst Peter Arden said. "CBH have some fair assets in their portfolio, Perilya's got quite a bit of cash and it makes a lot of sense to put them together." A merger would create an entity with a diversified portfolio amid forecasts of falls in the zinc price. Brokerage Goldman Sachs JBWere forecast that a growing surplus of zinc will drive the price of the base metal down in the coming years.

"The implication is that annual average zinc prices will trend sharply lower over the next two years," Goldman Sachs said in a February 7 client note. In 2002, Perilya outbid CBH to acquire the south mine from Pasminco. Yesterday CBH's shares closed 7 cents higher to 42 cents while Perilya finished 9 cents lower at $1.805.

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