McKinsey advises NMDC to endorse Legacy rights issue

NMDC,as the majority stakeholder in the Australian mining firm,had asked McKinsey in May to suggest whether or not to proceed with the rights issue.

In July,the consultancy firm submitted its report wherein it suggested that a revised rights issue represents the most effective way for for managing Legacys cash requirements. The Navratna miners board would take a call on the issue this month.

Supporting the rights issue would help the Navratna miner potentially increase its shareholding in its Australian subsidiary at a discount to current market pricing,rather than paying a premium (as normally associated with take overs or increased control transactions),the consultancy firm pointed out.

Equity markets are currently depressed and this offers NMDC an opportunity to increase its shareholding in Legacy at a relatively lower cost. Besides,allowing Legacy to go bankrupt will not be a feasible proposition and legally incorrect, McKinsey said in its report.

The offer price of Legacy in the previous offer was 5.7 cents a share whereas the present price is around 3.7 cents which is roughly 65 per cent. Considering that the state-owned miner is the majority stakeholder,NMDC would have to provide A$12.5 million to acquire rights equivalent to its 49.6 per cent stake in Legacy. NMDC had spent close to Rs 100 crore to acquire 50 per cent stake.

Simultaneously,the Legacy management has embarked into an exercise to contain costs in the company.

At a recent board meeting of Legacy,the directors sought to prune administrative expenditure from A$2 million to less than A$1 million. They also sought shifting of the companys headquarters from central to western Perth after the rights issue.

Last year,both NMDC and Legacy fought a turf war on the issue of expenditure. The Navratna miner had even shot down a demand from its Australian arm to reimburse A$8,36,502 as investment for exploration in the Mt Bevan mines in Perth saying the expenditure was unilateral and above the approved budget.

NMDC officials privately say that they were unable to fathom the demand from Legacy as it surpassed the approved spending limit. They questioned Legacys A$7,62,445 spend against the approved budget of A$80,000.

Besides exceeding their budget by A$6,82,445,Legacy also asked for A$1 million to meet their expenditure for the current month.