interesting reading

article 19/9/05 The Age page 6 Business

EXCO Resources will be worth watching in the months ahead as a classic Mexican standoff with "Big" Mick Davis at Xstrata resolves itself.

Tiny Exco has a portfolio of undeveloped copper/gold deposits just down the road from Xstrata's Ernest Henry copper/gold mine — an operation that is fast running out of reserves.

Ernest Henry is making money hand over fist at current metal prices but it all comes to an end in 2011 when the known reserve base is exhausted.

Extending the life of Ernest Henry becomes doubly important for the giant Xstrata when it is remembered that it supplies about one-third of the concentrate supplies to the smelter at Mount Isa.

There is good reason to think that Exco's deposits are probably worth $50 million to Xstrata. But Exco's total market capitalisation is only $22 million.

That would make Xstrata think it would be cheaper just to buy Exco. But the problem with that is that Exco management and friends could probably lay claim to 40 per cent of the company, meaning a low-ball bid won't work.

So if Xstrata wants a quick fix to its Ernest Henry reserves problem, it is going to have to pay up for Exco's life-extending reserves, with something well north of $22 million required.

That raises the prospect of Exco making a capital return at a level, per share, approaching its current share price of 18.5¢, leaving it to pursue its remaining exploration and development interests with the leftover cash.

On that score, it is worth pointing out that its 60 per cent-owned White Dam gold project in South Australia has come through its pre-feasibility study stage sporting robust economics.

The base case model on White Dam came up with a net present value of $16 million. Throw in the group's exploration interests and you can see why a takeover from Xstrata that values the whole box and dice at just $22 million is not on.