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NZOG primed for more Pike River delays

Friday 29th October 2010

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New Zealand Oil & Gas is already anticipating further delays to projected coal production by Pike River Coal because of the likelihood that the troubled West Coast miner will breach debt covenants again before reaching full production.  

However, an appraisal report prepared ahead of a special meeting of PRC shareholders on Nov 15 says “the Independent Directors of Pike River do not consider that any further extension would be warranted for at least the next six months.”

Special shareholders’ approval is required for the extension of NZOG’s option to purchase PRC coal, which was granted late last year when PRC issued $28.9 million of two year convertible bonds to NZOG, its largest shareholder at 29%, to cash out of its obligations to US-based Liberty Bonds following a breach of covenants with Liberty.

The NZOG Bonds require PRC to maintain a rolling 12 month debt service cover ratio (DSCR) of at least 1.6 times.“Future potential non-compliance of the DSCR in the near-term is likely and therefore it is possible that NZOG may seek further Option Extensions,” the appraisers’ report says.

“It is likely, in our view that the DSCR will be below the 1.6 threshold required for compliance for at least the next two quarters. This would require the Company to seek additional waivers in the future to avoid any review events under the terms of the NZOG Bonds and Bank of New Zealand debt facilities.”

Extending the coal purchase option, which ultimately gives NZOG rights over 30% of the production of the mine over its expected 18 year life, requires shareholder approval to satisfy by NZX and ASX Listing Rules.  The independent appraisers, Campbell MacPherson, assess the value of the extended option at just $1.1 million.  The special meeting will coincide with PRC’s annual meeting.

The alternative to extending the option was to raise the interest rate on the NZOG bonds by between 50 and 250 basis points, adding costs of up to US$578,000 at a time when PRC’s working capital is already constrained. The company is some two and a half years behind schedule on plans to produce approximately 1 million tonnes of high value, hard coking coal per year, owing largely to under-performance by the mining equipment originally used and difficulties in underground road-building.

Anticipated production of up to 630,000 tonnes in the June 2011 year have been scaled back to 320,000 tonnes.

The Campbell MacPherson report makes no recommendation to shareholders, but finds the offer to extend the NZOG option “fair and reasonable”.

“Whilst an extension of 12 months appears generous in comparison to the delay period to date, risks remain around the ramp-up timetable to reach steady-state production.”

Approving the extension would avoid the covenant waiver recently granted by NZOG being revoked, and triggering possible breaches with the BNZ. PRC had fully drawn secured facilities with the BNZ of $22.9 million at June 30.

PRC has recorded cumulative net losses after tax since listing on the NZX in July 2006, having previously been an NZOG subsidiary.

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