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Chucke I know what you're saying mate.. here something to read anyway..

By Greg Peel

The Minmetals deal to buy a large swathe of OZ Minerals' (OZL) assets grabbed the spotlight last week, leaving analysts surprised at what a good outcome the deal ultimately proved to be. OZ got to keep its jewel in the crown Prominent Hill project as well as its promising Martabe site, and despite losing another valuable copper-gold asset in Sepon nevertheless emerged as a strong local gold-copper player with loads of cash and further takeover attraction.

As analysts marvelled over the backdoor bonanza, little attention was given to exactly what OZ has lost. Or more importantly, what the Chinese have gained.

As well as Sepon, Minmetals picked up (assuming the deal is consummated) Golden Grove, Century, Roseberry, Avebury, Dugald River, High Lake, Izok Lake and a few other exploration sites. Amongst that collection is quite a goodly supply of zinc. Enough to keep the Chinese well-stocked. Analysts were very happy with the deal, from OZ's perspective, given OZ is left with mostly copper and gold. Gold is seen as having plenty of latent upside from global monetary stimulus, and copper is seen as the metal that will turn first when the world does honestly start looking at a recovery.

Copper is used for electrical wiring and is by far the best material for the job, making it largely "unsubstitutable" when the Chinese (and Indians and others) get on with the business of building first houses and appliances for the masses. Among other things zinc is used for galvanising, but rust protection can be sought elsewhere if necessary. Similarly, nickel is used to make stainless steel but you can also use chromium, making nickel, as well as zinc, sufficiently substitutable. We tend to think of the great commodity price bust as occurring around mid 2008, but in reality the zinc price peaked in late 2006 and has never recovered. At around US50c/lb the zinc price is where it was in 2004.

There have been some positive movements of late in metals prices, including zinc's. Metal prices have rallied on a combination of (a) a weaker US dollar (the inflation trade); (b) a more positive tone in global stock markets; (c) short-covering of speculative positions; and (d) Chinese re-stocking. None of these factors, however, imply any increase in real demand. And indeed, there hasn't been.

Chinese restocking has been giving a somewhat misleading impression that China is back in the game again, but it is common for Chinese inventories to ebb and flow in a de-stocking/re-stocking cycle. When prices collapsed China simply worked down its existing supplies - bought at higher levels - and now that prices are cheap China is buying up again. It doesn't have any greater need for metal right now, nevertheless. Indeed, Chinese domestic zinc supply has fallen 25% year-on-year given the number of mines which have become uneconomical at the current price level. The Shanghai zinc price was sitting much higher than the London price as a result, and hence Chinese imports of zinc surged on what is effectively an "arbitrage" trade.

It might make one wonder why China is thus so keen to buy OZ Minerals' zinc assets. FNArena subscriber and independent analyst/investor (and OZ shareholder) Peter Scales puts it this way:

"Not only does the deal deliver [Minmetals] a significant footprint in Australian mine production it also delivers significant potential influence over the zinc price to be paid by the Chinese users, since OZ was the second largest global supplier. Mothball just the Century mine and watch the zinc price recover - though the Chinese zinc buyers will now be able to source the bulk of their needs from the ex-OZ operations and the rest of the market can go whistle."

Citi commodity analyst Alan Heap points out that given the zinc price began to fall long ago, it is the zinc market which is furthest through the process of supply curtailment and the abandonment of marginal mines and projects. On this basis one might assume the zinc price should be the first to show a meaningful recovery down the track, but Heap suggests curtailed production can just as quickly be brought back on line, keeping a lid on any price hikes. He suggests the price will remain on average at US48c/lb for the next two years at least.

Heap does not address the additional effect of Minmetals' new acquisitions on what our biggest zinc customer might ever be willing to pay.

Taking the story beyond just zinc, Scales believes that while OZ may now be rent as under the split operations will likely still work closely together, even to the point where Chinese banks would be willing to offer finance for OZ in place of the "flaky" local financiers who were quick to pull the pin on what was and still is a "very decent" longer term prospect. Oxiana's Owen Hegarty had the vision of building a mining conglomerate that could one day rival the BHP/Rio duopoly. Don't think the Chinese haven't got the same thing on their minds.