Australia's CBH Cuts Zinc Output and Reviews Takeover Plans

Australia's small CBH Resources Ltd will cut output by a third and review takeover plans for rival Perilya Ltd, it said on Friday, as a dramatic fall in zinc prices has rendered half the world's producers unprofitable.

CBH managing director Stephen Dennis told Reuters in an interview that CBH, which also is laying off half its staff until zinc prices improve, had "some concerns" over its all share offer for Perilya, which has already nearly halved output amid a rapidly deteriorating global zinc market.

"Following the release of Perilya's quarterly report we do have some concerns about where they are going with their own financial position," Dennis said.

As a result of tumbling prices, CBH will cut ore production by 30% to 658,000 tons in the 12-month period to 30 June, 2009, reducing zinc concentrate output to 78,200 tons lead concentrate production to 38,700 tons, Dennis said.

While those sums are small for a global zinc market of 11 million tons a year, they will help whittle down a supply surplus that threatens to expand this year as the worst global financial crisis tilts the world into recession.

Zinc, mostly used as an anti-corrosive in galvanised steel, sells for around $1,120 a ton at the London Metal Exchange, less than half the price in January.

"We've got at least 50% of world zinc production under water at present," Dennis said.

In its quarterly report on 31 October, Perilya projected its cash operating cost should average between 60 and 65 US cents per pound of zinc from January 2009, above the current market price of around 50 cents a pound.

"We'll be continuing to review our position as we go forward, Dennis said. "But we are going to issue our bidder's statement next week."

CBH announced earlier on Friday that falling prices would also force it to cut its staff to 115 people from 233.

offer worth A$44m

CBH on 2 October said it would only offer 2.8 of its shares for each Perilya share if Perilya completed the sale of its Mount Oxide copper mine project in Australia, but 4.2 of its shares per Perilya share if it held on to the project.

The sale of the project collapsed last week.

The 4.2-for-one offer is worth around A$44m ($29m) based on CBH's closing share price of A$0.052.

Perilya's board is advising shareholders not to take action until it makes a recommendation on CBH's offer. CBH and Perilya terminated a friendly merger proposal just over two months ago.

The idea behind the latest merger proposal is to reduce costs by combining Perilya's ageing Broken Hill zinc and lead mines in eastern Australia with CBH's adjacent operations, helping sustain operations through the current downturn.

Bigger operators are also considering taking action, with Oz Minerals Ltd considering a full or partial closure of the Australian Century zinc mine the world's second largest.

Kagara Ltd, has already cut its 2008/09 zinc target by 12.5 percent to 35,000 tons and warned it might not meet an annual target of 100,000 tons of zinc in about two years.

CBH sells its lead concentrate to the Nyrstar-owned Port Pirie smelter near CBH's mine, while the zinc concentrate is divided between a Nyrstar smelter in Risdon, Australia, and Asian buyers, Dennis said.

"We don't want to close the operation at this point because we do believe the fundamentals are such that there will be a recovery in due course," Dennis said.

"But we certainly can't continue to produce metal at a loss, so we minimise our production and stay in the game," he said.

By Lincoln Feast, Reuters.

($1=A$1.50