21/08/2008 - 09:25

Perilya downsizes ops, cuts 440 jobs

21/08/2008 - 09:25

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Falling commodity prices have hit Perth-based miner Perilya Ltd which will halve ore production at its Broken Hill operation in South Australia and cut 440 jobs.

Perilya downsizes ops, cuts 440 jobs

Falling commodity prices have hit Perth-based miner Perilya Ltd which will halve ore production at its Broken Hill operation in South Australia and cut 440 jobs.

The company today said that following an extensive review of its Broken Hill mine, it will reduce ore production from 1.8 million tonnes per annum to 950,000tpa.

Under the revised operating plan the operation is expected to produce about 55,000t of zinc and 50,000t of lead at slightly higher grades.

The company has also closed out its $60.3 million hedge book.

With a downsizing of its Broken Hill operation, the company will also significantly reduce its workforce, cutting employee numbers from 760 to 320.

It said the reduced workforce will save the company $20 million.

"The resizing at the Broken Hill Operation is prudent, conserves cash and positions the operation for the future," executive chairman Patrick O'Connor said.

"The company is confident that the Broken Hill Operation can be sustained to maintain a level of continuity of production and one that is financially viable at current metal prices for at least the next 2 to 3 years without significant compromise to the longer-term life of mine."

Perilya said it will also reduce its capital and development expenditure with spending in FY09 of $25 million lowered to $15 million in the next year.

The company is also looking to offload its Mount Oxide copper and cobalt project and is currently reviewing expressions of interest. It expects to report on the review next month.

Perilya is due to report full year results next week.

 

Below is the full announcement:

Perilya (ASX code: PEM) advises it has completed an extensive review of its Broken Hill zinc, lead and silver
operation and implemented a plan to resize the operation in light of current low metal prices.

As a result of this review, production at the Broken Hill Operation will be focused on a lower tonnage profile
around mining remnant pillars and stopes with low development requirements in the Southern Operation. The
North Mine and Potosi exploration decline will be placed on care and maintenance.

These operational changes are aimed at ensuring the Broken Hill Operation maintains a production level that is
financially viable and allows the operation to weather the current low metal prices. The Broken Hill Operation will
be well positioned to re-establish increased production and profitability in the future when metal prices increase.

Under the revised operating plan, ore production will reduce from 1.8 to 0.95 million tonnes per annum, which is
expected to produce approximately 55,000 tonnes of contained zinc and 50,000 tonnes of contained lead. Mining
grades will increase to 6.5% and 6.0% for zinc and lead respectively.

In conjunction with the resizing, Perilya has closed-out its hedge book realising $60.3 million in cash. The hedge
book was closed to realise its inherent financial value and to strengthen the company's balance sheet during this
period of low metal prices.

Patrick O'Connor, Perilya's Executive Chairman, said, "The resizing at the Broken Hill Operation is prudent,
conserves cash and positions the operation for the future. The company is confident that the Broken Hill Operation can be sustained to maintain a level of continuity of production and one that is financially viable at current metal prices for at least the next 2 to 3 years without significant compromise to the longer-term life of mine."

"Should metal prices increase in the future, we will be in a strong position to ramp-up production at the Broken Hill
Operation and to utilise the full potential of the Broken Hill concentrator with ore sources from the Southern
Operations, Potosi, the North Mine and Flying Doctor," he said.

"Regrettably, the lower production rate necessitates a reduction in our workforce from 760 to 320 employees.
The affected employees will be provided with their full entitlements and supported in the transition. The decision
to reduce our workforce has not been taken lightly and we are mindful of the impact upon individuals, their
families and the community. We firmly believe that this is the best option to ensure continuity of operations and to
preserve the mine for the long-term benefit of the community and the shareholders." he added.

"Perilya is in a sound financial position with cash reserves and low debt to weather the current period of low metal
prices," he added.

Further details on the resizing at the Broken Hill Operation, the closure of the hedge book and future strategic
intent is set out below.

Broken Hill Operation Resizing

As foreshadowed in the June Quarterly Report the company has completed an extensive review of the Broken
Hill Operation in light of the current metal prices environment.

The review has resulted in a resizing of the Broken Hill Operation to focus on a reduced tonnage, lower cost
operation at the Southern Operations. The North Mine and Potosi exploration decline will be placed on care and
maintenance.

Importantly, an extensive exercise was undertaken to assess multiple production options, which has resulted in
the new production plan being based largely around the re-sequencing of mining areas rather than a short-term
high grade approach, which can undermine the long-term value of the resources.

The revised production plan, which will take effect from September, is aimed at sustaining a lower cost operation
that is expected to remain financially viable at current depressed metal prices for the next 2 to 3 years. The
revised production level will also preserve the potential for a mine life of in excess of 7 years and position the
operation to rapidly increase production and profitability should future metal prices and economic conditions allow.

Future ore production at the Southern Operations will focus on the utilisation of stopes that are currently available,
or require minimal development, and the bringing forward high grade pillars that were originally planned to be
mined in the latter years of the Life of Mine Plan for the Southern Operation.

A summary of the production and operational changes include:

- A reduction in milled tonnage from 1.8 to 0.95 million tonne per annum ('mtpa'), with annual production
of approximately 55,000 tonnes of contained zinc and 50,000 tonnes of contained lead.

- Higher zinc grades of 6.5% and lead grades of 6.0% on the back of increased remnant pillar production
(compared to current grades of 5.8% zinc and 3.5% lead).

- Exposure to spot prices, with hedging restricted to QP hedging and the use of option contracts.

- Reduction in manning levels by approximately 440, at a total cost of $20 million.

- Lower capital and development expenditure for FY09 forecast at $25 million reducing to $15 million in FY10.

- Lower exploration expenditure within the Broken Hill region.

- Further cost reductions at the corporate head office.

The revised production plan has demonstrated that the Broken Hill Operation can continue to operate in this
mode for 2 to 3 years at current prices, whilst preserving optionality to ramp-up production, should metal prices
increase. In conjunction with the review, the company has substantially completed a review of its Life of Mine
Plan, which is expected to show that subject to an improvement in metal prices and based on known mining
inventories, the Southern Operation can run for at least a further 7 years. In addition, there are significant
additional mineral inventories also available at Potosi, North Mine, Flying Doctor, Pinnacles and other regional
deposits. The Life of Mine Plan is based on a longer-term view of metal prices.

The lower production rate will result in manning levels reducing from 760 to 320 employees. The company will
work closely with its employees and contractors, union officials and the Broken Hill community to assist in finding
alternative employment for those affected. These redundancies are expected to commence from 1 September
2008.

The company is committed to Broken Hill and will work with the Broken Hill Council to mitigate any short term
effects and build a sustainable future for the operation and the community. Perilya is also working closely with
the State Government of New South Wales in a positive way to ensure the continuity of operations in Broken Hill.

The restructure will also provide for the management of all exploration activities in Broken Hill and for the Flinders,
Zinc Oxide project to be transferred to the responsibility of the Broken Hill Operation to provide the most cost
effective retention of expertise and asset management.

Furthermore, capital and operating costs are planned to be significantly lower following the resizing. Under the
revised production plan the operation is expected to maintain financial viability at current prices (net of mine
development and capital).

The strong focus on cost control has continued to see further improvement in reducing direct cash operating
costs and this revised operating plan should deliver further significant improvements.

Permitting of the Flying Doctor open pit resource will continue, together with mine planning work to assess the
potential of the North Mine and North Mine deeps mineral inventories.

There will also be further reduction in staff at the Perth head office so as to reduce the corporate overheads.
Hedge Book Closure and Future Hedging Policy

The company has closed all hedging contracts with a maturity date beyond 1 September 2008 resulting in a net
cash inflow to Perilya of A$60.3 million.

The closure was facilitated in two stages; firstly the pre-delivery of a number of zinc contracts that were due to
mature between September and December 2008 and secondly the financial settlement of the remaining forward
contracts in both zinc and lead and the outright sale of all option contracts relating to lead and to the Australian
Dollar (AUD).

The cash gain has been received in full and is net of all deferred premiums that were due on the lead and AUD
option contracts.

At 30 June 2008, the mark to market of the hedge book was approximately A$80 million. During July the mark to
market fell significantly as a result of the increase in the lead price. On the date that the decision was made to
close the hedge book, the mark to market of the book had fallen to approximately A$48 million.

Given the very high volatility seen recently in the currency and commodity markets, the Board considers the net
gain of A$60.3 million to be an excellent outcome for Perilya. Proceeds from the hedge book closure will be used
to fund the resizing of the Broken Hill Operation (including redundancy costs and working capital requirements)
and to repay $10 million in borrowings.

As a consequence of the closure of the company's hedge book, the future hedging policy will be restricted to
Quotation Period "QP" hedging (i.e. hedging of product sales as they occur) and the use of options contracts to
manage the company's revenue protection. The company has retained sufficient hedging contracts to meet its
anticipated production until 31 August 2008, at which time it will become exposed to spot lead and zinc prices and
the USD/AUD exchange rate (subject to any future QP hedging or option contracts).

Financial Impacts

Perilya further advises that as a result of the decisions on Broken Hill and as part of the preparation of 30 June
2008 Financial Statements and the year end audit, the Board will assess the carrying value of the company's
assets for impairment in accordance with relevant accounting standards. The carrying values for Broken Hill will
be influenced by the lower production profile and the prevailing spot metal prices. Furthermore, in light of the
current liquidity issues facing global financial markets and the weak equity markets, the Board will also be
reviewing the realisable value of the company's financial assets including commercial paper and listed
investments. Full details will be available on 29 August 2008 when the company expects to release its full year's
results.

Future Strategic Intent

As part of the Board's strategic review of the Broken Hill Operation, its remaining assets and capital management,
it is evaluating expressions of interest for the Mount Oxide copper and cobalt project and other opportunities to
increase shareholder value from the remaining underlying assets of the company, including its non-core
exploration assets.

The Board expects to be in a position to report on the review of the expression of interest for its Mount Oxide
copper project in September 2008. An ultimate decision on the Mount Oxide project will be made on the basis of
maximising value for Perilya shareholders.

Following the outcome of the Mount Oxide process, a review will be undertaken on any surplus capital, after
assessing the capital needs of the resized Broken Hill Operation, and a prudent capital management program will
be initiated. It is expected that an announcement regarding future capital management strategies will be made by
31 October 2008, with any required shareholder approvals to be obtained at, or prior to, the company's Annual
General Meeting, which will be held during November.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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