sell or hold on?, page-9

hi HT a few thoughts to ponder in this..

"Minmetals' purchase of OZL's zinc assets," said the Deutsche Bank analysts this morning, "is a sensational and unlikely outcome."

Ain't life a funny thing.

It was only in late 2007 that the share price of a once mighty OZ Minerals (OZL) was trading over $4.00. As the cosy marriage of two of Australia's leading mining companies - Oxiana and Zinifex - OZ Minerals had been dubbed Australia's third biggest diversified miner after BHP and Rio. A long way third, albeit, but in such company OZ was nevertheless declared one of Australia's jewels. And with commodity prices at record levels and Chinese demand supposedly inexhaustible, the only way was up for OZ.

Except it wasn't. In fact, the only way was down - all the way to 40c as potential bankruptcy loomed. The fall from grace was spectacular but the cause was straightforward. Commodity prices had collapsed and it was now costing more for OZ to produce its metals, on a net basis, than it could sell them for. Every day that metals prices remained low, OZ was simply burning cash. And OZ had a mountain of debt to service - debt that would cost a whole lot more to refinance in a GFC. If OZ had had a family it would have quietly been "making preparations".

Then along came Minmetals - a white knight in a conical straw hat. We'll pay a handy price for your good stuff, said Minmetals, and that will get you out of debt. You'll still have a few little assets left to toy around with.

OZ was left with little choice. It was either sell to the Chinese for a reasonable price or break up the pieces and sell to the vultures in a fire sale. Within the mix were some promising assets - mostly copper, and some not so promising assets, mostly zinc. (One is reminded at this point that for many years in the bull run, two brokers - Merrill Lynch and JP Morgan - swore that Zinifex, the zinc part, was way overvalued.)

But the deal had to meet with FIRB approval, and this put Wayne Swan in a very tough position. Does he bow to the xenophobic will of the people and rebuff the Chinese, or does he allow a company with so many mum and dad and superannuant shareholders to go under with a whimper? His answer was very clever.

"We will not allow the deal to go ahead because one asset - Prominent Hill - is next door to an Australian military facility. On the basis of Australian sovereign security this deal naturally cannot be permitted. We're sure the Chinese will understand."

Not only did they understand, they got the hint.

The market held its breath this week when OZ went into a trading halt. Was the news going to be bad or good? Have OZ's financiers lost patience and pulled the pin? Or have the Chinese, or anyone else for that matter, come back to the table?

The latter was the case. Minmetals has come back with a deal that has left stock analysts staggered. The company had agreed to buy a range of OZ assets and not others, but in so doing still fix OZ's critical debt problem. If the Chinese still thought they were getting a bargain in the long term then it was as win-win a deal as any deal can be. Minmetals has now offered to buy what are largely OZ's zinc assets while leaving OZ with what are largely copper assets, including what was always OZ's jewel in the crown - Prominent Hill.

The new deal must also go to Canberra for fresh approval, but given Canberra provided the "out" and Minmetals took it, one presumes this time approval will be just a rubber stamp.

And then OZ will no longer be a company overwhelmed by debt and forced to sell off its children, it will be a company with $600m of cash in the bank and the favourite children still at home. It will live to fight another day.

While stock analysts are still shaking their heads at this previously unforeseen twist in the tale, on a valuation basis it's back to business. Having mostly assumed the original deal would go through from the outset, analysts have now reduced the average target in the FNArena database from 83c a week ago to 62c now. The share price is not much below that this afternoon, but that's not the point. The point is that one day, when the GFC eases and global commodity demand begins to return, OZ will be in a good position to take advantage once more. Even those brokers who don't much like the look of copper right at the moment concede that it will be copper that will lead the charge back up.

JP Morgan cut its target from 83c to 60c this morning but moved its rating from Neutral to Overweight. Two brokers who had allowed some risk upside for the first deal to go through originally - Macquarie and UBS - also cut their targets but went the other way and downgraded from Outperform to Neutral and Buy to Neutral respectively, on the basis that the new deal left OZ shares at about fair valuation. That leaves OZ with a 2/6/0 B/H/S ratio of the brokers who reported this morning, with BA-Merrill Lynch maintaining its existing Buy rating.

But more importantly it leaves OZ with a life.