Arbitration Hearing could be a two edged sword for

  1. 3,816 Posts.
    Arbitration Hearing could be a two edged sword for ANL directors
    I was sifting through some internet archives and came across this post by sprocket99 ( 21/03/01 19:52) in a
    Hotcopper discussion titled "ANL announcement" :

    Don't know about the good news, it looks like some paranoia has hit Twiggy - he should have taken the $5
    offered by Anglo last year rather than being greedy.

    All I can say is heaven help any ANL holders.

    HOMEX - Sydney
    Clarifying Statement
    In response to a query raised by the Australian Stock Exchange
    Limited, we consider that the market is being materially misinformed
    by third parties about the financial and operating status of Anaconda
    Nickel Limited ("Anaconda" or the "Company"). We are also concerned
    by the sharp decline in our share price that has taken place in the
    closing minutes of trading on 19 March 2001, 20 March 2001 and this
    morning and know of nothing relating to the Company's operating or
    financial condition that would warrant such declines. The Company has
    requested that the Australian Stock Exchange Ltd undertake an
    investigation into whether or not there has been manipulation in the
    price of Anaconda stock and would like to update you on aspects of
    the Company's activities.
    In this context, we also refer to the article in the Sydney Morning
    Herald ("SMH") dated 17 March 2001 entitled "Time's Running Out for
    Anaconda". The Company has not received any ultimatum from Anglo
    American Plc ("Anglo"). Please be assured, the Company's Board of
    Directors ("Board") would in all events take whatever measures are
    necessary to protect the interests of all shareholders of Anaconda.
    We also note that Anglo reported to the Company's management that
    last week's write down of its $3.15 per share (plus Alpha) investment
    in the Company was a result of requirements of international
    accounting standards, specifically taking into account market value
    of listed investments as adjusted for foreign exchange movements.
    Anaconda confirms that its Murrin Murrin Nickel Cobalt Operation
    ("Murrin Murrin") has been operating at 65% of design capacity during
    the current month, ahead of schedule, and anticipates that it will
    operate at 100% of capacity in the first half of next year, as
    previously reported. Murrin Murrin, now operating cash flow positive,
    is expected to operate at a rate that will cover operating costs,
    principal repayment and interest, during Q3 this year. The Company
    further confirms that, contrary to reports, ore mined solely at
    Murrin Murrin will allow Murrin Murrin to achieve 100% of design
    throughput, over the 30 year life of its mine plan, with no further
    outside ore resources required.
    The Company also notes that the delay in completion and ramp-up of
    Murrin Murrin were the result of the failure of the EPC Contractor,
    Flour Daniel, to deliver a "fit for purpose" plant on time. The
    Company is in arbitration proceedings against Flour Daniel and has
    entered a claim of US$650 million. It is expected that the
    arbitration proceedings will be completed by February 2002.
    The Company is organizing the transfer of substantial non-nickel
    assets to another company which would be spun off to current
    shareholders to ensure that the Company's current shareholders
    participate in the full value that is inherent in these assets. These
    assets include the Company's ownership of gas pipeline, licences to
    the North East Goldfields region, water rights to the massive,
    Officer Basin water resource, the world class Mt Weld Rare Metals
    resource including titanium, tantalum, niobium and zirconium
    deposits, the Mt Weld Phosphate and Rare Earth project interests and
    significant Magnesium resources. This initiative may be accompanied
    by the establishment of a separate security which would be
    distributed to shareholders, or a special dividend that would provide
    a direct economic interest in the Company's 60% share of the US$650
    million arbitration proceedings against Flour(sic) Daniel.
    The Company is also exploring the possibility of listing its shares
    in the United States and adopting measures to protect the interests
    of the current shareholders of the Company from third-party attempts
    to take advantage of the current depressed level of the Company's
    share price.
    The Company confirms that it had discussions with US bondholders of
    Centaur Mining & Exploration Limited ("Centaur"), has reached no
    agreement, and will continue to pursue interest in Centaur, if any,
    with Centaur's Australian Receiver and Manager. We again confirm that
    Centaur's ore is of no interest to the Murrin Murrin Plant.
    The Company will continue to update the market on the status of
    Murrin Murrin, which, as previously noted, anticipates generating
    strong cash flow in the near-term and will complete its ramp-up ahead
    of schedule. These facts, combined with the low operating costs
    emerging at Murrin Murrin and the Company's 3NP strategic position in
    the world nickel industry, is supporting the Company's current
    activities and its continuation of a strong financial track record.
    In this regard, Anaconda has retained an investment banking firm in
    the United States to continue to consider and execute financing
    alternatives that both strengthen the Company's balance sheet and
    support the significant values the Board believes are inherent in
    Murrin Murrin and Anaconda.
    A Coogan
    Andrew Forrest
    Anaconda Nickel Limited Turnbull Porter Novelli
    Tel: (618) 9212 8400 Tel: (618) 9386 1233

    This post was made at a time when rewlin and my other 'M' friends had plenty to say about ANL's golden future. But after looking at this release and the recent Secured Creditors Presentation (this is the hyperlink to the pdf document), I believe that the current Arbitration Hearing against Fluor Daniel will answer some very interesting questions for past and present ANL shareholders.

    ANL has received some very favourable press and broker reports over the years. This is very understandable, given the operating cost estimate of around 200 million AUD per annum for 45,000 tpa nickel production, and all from ore once considered to be uneconomic. But the reality (claimed by ANL to be the result of Fluor Daniel not meeting its contractual obligations) has been higher operational costs (around 465 million AUD for 2000/2001 I believe) and an operational cashflow insufficient to meet those costs, let alone things like interest payments, currency hedging obligations, and the eighteen odd million AUD due to CXL in September 2002. To illustrate this difference I have prepared the following cost comparison table for Murrin Murrin from information in the Secured Creditors Presentation :

    Predicted 2002/03 estimate Cost overrun Cost overrun as a %
    million AUD % of cost million AUD % of cost million AUD of predicted cost
    Mining 32.81 17% 74.76 21% 41.95 127.86%
    Sulphur 54.04 28% 60.52 17% 6.48 11.99%
    Other Chemicals 48.25 25% 85.44 24% 37.19 77.08%
    Process Labour 25.09 13% 24.92 7% -0.17 -0.68%
    Maintenance 19.3 10% 81.88 23% 62.58 324.25%
    Administration 13.51 7% 28.48 8% 14.97 110.81%
    Totals $193.00 $356.00 $163.00 84.46%

    (Unfortunately I do not have the cost breakdown for 2000/2001, though I would be interested to see this if someone could post it.)

    Of interest to me is that the cost overruns are not confined to plant maintenance.

    This raises questions of how feasible the initial operating cost estimate ($193millionAU per annum) and production target (45,000 tpa) were for Murrin Murrin, based on the information available, and how much responsibility Fluor Daniel should bear for the plant failures and cost overruns? The Arbitration Hearing will give answers to these questions, particularly how ANL’s ‘fit for purpose’ claim is interpreted. 'fit for purpose' could mean "a plant producing 45,000tpa of nickel and 3000tpa of cobalt from 4million tpa of ore", but it could also mean "a plant producing 45,000tpa of nickel and 3000tpa of cobalt from 4million tpa of ore, based on specifications derived from information available at the time of construction". In the former case Fluor Daniel's goose is well and truly cooked. In the latter case there would need to be a determination of how validly the plant specifications were derived. The plant failings were obvious after commissioning, but it is easy to be wise in hindsight. I am therefore curious to see if the Arbitration Hearing gives an insight as to whether ANL had concerns with the plant specifications before or during construction, or if they had any idea as to what those specifications should be? In ANL's quarterly reports during construction and commissioning, there is mention of the technical training given to on-site personnel. For example, from the September 1998 Quarterly Report (html hyperlink):

    At the date of this report 265 site based Anaconda personnel are on site with the remainder undertaking training prior to mobilisation to site. High grade ore is currently being stockpiled in preparation for start-up of the ore leach facility in November this year.
    The metallurgical processing team has received extensive training at Anaconda’s computerised training centre in Perth, as well as "live" operating experience and training at the Dynatec Corporation (formerly Sherritt International) Moa Bay facility in Cuba and the Fort Saskatchewan plant in Canada. Both Dynatec and Fluor Daniel have seconded experienced hydro-metallurgical plant operators and training personnel to Murrin Murrin.

    Given the efforts and innovations of the "World's most experienced hydrometallurgical team" (as described in the February 2001 Roadshow Presentation) in rectifying the problems at Murrin Murrin, I also wonder if the Court will determine that the construction of a 'fit for purpose' plant was a feasible task for Fluor Daniel at the time?

    At one extreme the initial operating cost estimate and production target will be deemed feasible based on the information available at the time, and the problems at Murrin Murrin found to be due totally to errors of design and construction on the part of Fluor Daniel. In this event my 'M' friends will engage in much chest beating and rejoicing in the rewards of their faith. It would also put an end to my pessimistic blather, and may even prompt other companies to give the HPAL tango a bash.

    At the other extreme the operating cost estimate and production target will be deemed to have been infeasible. Fluor Daniel will be found to have performed its contractual obligations to appropriate specifications and standards based on information available at the time of construction. The problems at the plant will be deemed to have been unforeseeable failings associated with a little tested technology. To rub salt into the wound, ANL will have damages awarded against it in respect of Fluor Daniel's counter claim. To give you some idea of how much the Arbitration Hearing could cost ANL, I include the following excerpt (from page 32 of ANL's 2000 Financial Report):

    (b) Contingent Assets
    (i) The Murrin Murrin Joint Venture has issued Fluor Australia Pty Ltd ("Fluor") with a formal notice of
    dispute and letter of
    demand which, at the date of this report, seeks in excess of $300 million relating to rectification work, flash
    vessel retrofit,
    additional liquidated damages, costs of delays and other potential losses. The extent of the claim is under
    review and will
    increase significantly with the potential for $1 billion.
    Pursuant to a guarantee and indemnity provided by Fluor Corporation in favour of Anaconda Operations Pty
    Ltd as agent for the
    Murrin Murrin joint venturers, Fluor Corporation has guaranteed the performance of the EPC Contract and
    Assistance and Ramp Up Agreement by Fluor Australia Pty Ltd and has agreed to indemnify the joint venture
    for any loss and
    damage suffered by reason of breach of those agreements by Fluor Australia Pty Ltd. Fluor have submitted a
    Payment Claim for
    $438,509,099 in respect of amounts claimed against the Joint Venture under the contract. The amount includes
    $45,150,000 bank
    guarantees drawn down.
    Amounts totalling $434,589,614 under the Payment Claim have been formally rejected by the Project
    Mediation was held in March and April 2000, in which claims from both parties were heard. Both matters
    remained unresolved
    as a result of this process. The Murrin Murrin Joint Venture has since referred the matters to arbitration.

    This could be the death knell for ANL, but the result could provide shareholders past and present with a means of obtaining compensation, albeit small. This means rests on the question “Did the directors give adequate disclaimers to investors for the Murrin Murrin projections?”. (The claims for HPAL and Murrin Murrin have been used to raise a great sum of money, so for the sake of the directors involved I hope that the optimism for the project was based on sound information and scientific principles rather than gut feeling. An adverse finding could suggest a reliance on the latter.) ANL shareholders no doubt shared the optimism of the directors, but I am interested to know what disclaimers for Murrin Murrin my 'M' friends were aware of before they invested? I also note that the current press releases of ANL contain plenty of disclaimers. This is food for thought for the ANL fan club. (However, my inherent cynicism makes me wonder whether the interest in ANL of some of my 'M' friends is limited to a shareholding.)

    Disclaimer: I have never held an interest in ANL, but I am interested in resource companies that attempt to develop commercial applications for technologies with hitherto very limited or no commercial history. These companies may or may not have a commercial future, but I believe that ASIC should impose strict standards on their claims. A company that makes claims that later prove to be very optimistic, perhaps even fanciful, is not only of harm to its backers, it also could be damaging to the prospects of other resource technology companies.

    Would you dance the ANL tango?

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