External Factors
At US$1,192, the average realised zinc price in 1997/8 increased 6% compared with US$1,124 in 1996/7. The realised lead price was significantly lower in 1997/8, averaging US$562 compared with US$724 in 1996/7.

The average realised AUD/USD exchange rate for 1997/8 including the impact of the Group’s natural revenue hedge was 70.0 cents compared with 76.8 cents in 1996/7. The natural revenue hedge allows the Group to match movements in its US dollar debt against future revenue.

The Dutch guilder was marginally stronger in 1997/8, with the Australian dollar/Dutch guilder exchange rate averaging 138 cents compared with the previous year’s 140.3 cents. As approximately 15% of the Group’s cost base is in Dutch guilders, a stronger guilder has an unfavourable impact on the Group’s results.

The higher zinc price and weaker Australian dollar contributed $26 million and $68 million respectively to earnings. The lower lead price and stronger Dutch guilder reduced earnings by $40 million and $2 million respectively.

Operating Performance
The Group undertook a number of major capital improvement programs during the year. These included the refinery replacement and modernisation at Port Pirie, commissioning of the co-treatment process at Hobart and Port Pirie and the four-week campaign maintenance shutdown at Cockle Creek. Each of these impacted production and costs during the course of the year. Budel’s production performance improved.

Mine production for the year was affected by lower ore grades at Broken Hill, a ground fall at Rosebery in January 1998 which restricted production until June, and the availability of only a single production stope at Elura for most of the year.

Lower production volumes and higher costs in 1997/8 reduced earnings by $44 million and $32 million respectively.Lower metal premiums reduced earnings by $16 million in 1997/8.

Reflecting operating performance during the year and the impact of the lower lead price, the Group’s break-even zinc price increased from US$934/tonne in 1996/7 to US$998/tonne in 1997/8. Excluding the impact of abnormal items in each of the two years, the break-even zinc price rose from US$919/tonne in 1996/7 to US$1,061/tonne in 1997/8. Return on shareholders equity was 4.3% after inclusion of new equity raised for the Century project.

Cash Flow
The Group generated cash from operations of $220 million in 1997/8. From this, capital expenditure of $445 million was funded. Major projects included the Port Pirie refinery replacement ($16 million), Budel’s conversion to Century concentrates ($15 million), and installation of the Pasminco Business Systems ($28 million). Capitalised mine development expenditure was $35 million. Capital expenditure on the Century project was $255 million.

A dividend of 4 cents per share, franked to 96%, was paid in November 1997, the dividend payment totalling $32 million. Financing costs in 1997/8 were $14 million, $4 million lower than in 1996/7 due to lower average net debt levels during the year.

Although no tax was paid in Australia during the year because of the Group’s carried forward tax losses, the Group’s effective tax rate was 38%, 5% above the previous year’s rate. The higher tax rate was due to the reduction in eligible development, and research and development, allowances.

In November 1997, the Group completed an equity raising for the Century project totalling $669 million, net of expenses. The equity was raised through a 10% book-build placement to institutions of 79.5 million shares at $2.30 per share, immediately after the completion of the Century acquisition on 24 September 1997. The placement, which raised $183 million, was followed by a 2 for 7 rights issue to shareholders at $2.00 per share, which raised $500 million. Acquisition costs of $345 million (including Dugald River) were funded from the raising, and for the short term the balance of new equity was used to retire existing debt facilities. A review of progress on the Century project is contained on page 12.

Currency Options
A currency option program was recommenced in 1997/8 to protect the Group’s US dollar revenue stream against adverse movements in the AUD/USD dollar exchange rate. When the exchange weakened significantly in the latter part of 1997, and in periods of weakness since then, call options were purchased and put options were sold simultaneously. This is referred to as a collar option strategy. As at 30 June 1998, collar options to the value of US$940 million were in place over the period January 1999 to December 2001. The average strike price of the cap is US67 cents and the average strike price of the floor is US59 cents.

The effect of this strategy is to protect US$940 million of revenue against a rise in the AUD/USD exchange rate above US67 cents while forgoing the benefit of a fall in the exchange rate below US59 cents. It should be noted that for the six month period to 31 December 1998 the Group is fully exposed to the prevailing AUD/USD dollar exchange rate.

Full details of this position are contained in Note 22 to the accounts on page 59.

Financing Activities
The major financing activity during 1997/8 was the finalisation of a US$600 million facility to fund development of the Century project. Other financing activities were undertaken in relation to funding of ancillary projects associated with Century.

The credit watch negative announced by ratings agency Standard and Poors after the Century acquisition in January 1997 was removed in January 1998. Pasminco maintains its BBB credit rating.

During the year maturing bilateral debt facilities to the value of US$50 million and A$120 million were renegotiated.

As at 30 June 1998, the Group had committed facilities of A$1,590 million of which A$1,366 million was undrawn. Net debt at 30 June 1998 was A$167 million. The Group maintained a conservative balance sheet with a net debt to debt plus equity ratio of 10%.

Although debt will rise in the coming year as funding commitments for Century build up, the Group’s balance sheet and gearing ratio do not preclude it undertaking other development projects or acquisitions.

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