Oxiana's recently weak share price performance seems to be driven by something more than the weakness of the wider market. However, the company scotched suspicions that the key Prominent Hill project had met delays with a positive update today.
Prominent Hill is set to contribute around 115,000 tonnes of copper and 80,000 ounces of gold to group production in 2009. Importantly, the project is on schedule for first production in the December 2008 quarter and capital costs are within budget.
In the absence of project delays, we believe Oxiana's share price weakness is primarily related to the Zinifex merger. Oxiana was previously a copper/gold company. Although copper will still represent 50% of the merged group's total production, long-standing shareholders appear to be rotating away from what is now a diversified miner.
And with zinc currently on the nose, merging with one of the world's largest producers of the metal is weighing on sentiment towards Oxiana. While commodities in general have risen over the last few years, Zinc prices have been in decline since late 2006. However, we believe the outlook for zinc prices will improve in the months ahead and will provide more detail on this in a future report.
As we have discussed in the past, the Zinifex merger has diluted Oxiana's near term growth prospects. However, the deal also de-risks the company through improved diversification and a stronger balance sheet.
Although the diversification is presently working against the market's perception of Oxiana, we don't believe this will be the case longer term. Prominent Hill entering production later this year and the larger Martabe project coming into view next year should prove a positive catalyst for the company.
Oxiana have also announced the sale of a 10% interest in the Martabe project to Indonesian mining company, PT Antam Tbk, for US$66.5 million. Antam also hold options to acquire a further 15%. The deal is the first step in an agreement between the companies to explore potential joint venture opportunities in Indonesia.
Given Antam's leading position in the country's mining sector, the strategic partnership should facilitate greater access to Indonesia's resources for Oxiana. In this respect, we view the move as a positive for the company in developing their longer-term project pipeline.
The deal also values Martabe above the $415 million Oxiana originally paid (in scrip) for the asset, through the Agincourt acquisition.
With the stock's current valuation likely to appear cheap in the years ahead, we recommend Members continue to hold Oxiana.
OXR
oxiana limited
