oz minerals its oxiana again buy

OZ Minerals: its Oxiana again. Buy(from Eureka Report)

The hardest thing in investing/trading is remaining unemotional when considering the investment case of a stock that has previously damaged your portfolio. OZ Minerals was one of our best calls over the past five years. It was like a good family pet, yet one day that pet turned and bit the hand that fed it.

Everything was going according to plan until the “Pasminco curse” struck again.

No stock in the past six months has had more trading halts than OZ Minerals. This has been a see-sawing battle between the company, its bankers, the Foreign Investment Review Board, collapsing zinc prices and corporate buyers. However, now finally we have an outcome and we must assess the stock’s potential.

While most OZ Minerals shareholders would have most likely accepted the full-cash takeover at 82.5¢ from China Minmentals, in a strange way the Treasurer’s blocking of the full takeover on national security grounds will actually turn out to deliver patient shareholders a better long-term outcome than the 82.5¢ cash offer.

The revised deal from China Minmetals, which excludes the key Prominent Hill mine, is a relatively good outcome for existing OZ Minerals shareholders, while it should make the shares interesting to new shareholders. The fact is the new deal returns OZ Minerals back to its roots as Oxiana.

Before this week OZ Minerals was a highly geared majority zinc stock; today, it is a financially deleveraged copper/gold stock, assuming the new deal is approved. You can’t even compare the two, but the share price is pretty much the same as it was, as arbitrageurs who bought in hope of the full Minmetals offer sell stock.

Basically, OZ Minerals has negotiated a $US1.2 billion ($1.75 billion) deal to sell select assets to China Minmetals. Its syndicate of lenders have agreed to extend refinancing of its debt to April 30. The deal will see Minmetals purchase Sepon, Golden Grove, Century, Rosebery, Avebury, Dugald River, and other exploration and development assets for $US1.2 billion in cash.

OZ Minerals will retain Prominent Hill, Martabe, exploration assets in Cambodia and Thailand and its investments in listed entities. The good news is that if the company retires all its debts, barring its convertible bonds, it is expected to have a cash balance of about $600 million on completion of the transaction. Sure, the company has sold a significant amount of assets, but the huge reversal of the balance sheet is a very big development.

The list of assets retained, plus the cash from the sale of assets to Minmetals, adds up to a 62¢ per share base-case valuation. If we run today’s spot metal prices through our valuation it equates to 83¢. The higher spot valuation reflects today’s higher spot copper price. Zinc is now completely out of the equation, which is good!

In this valuation, I have attributed zero value to exploration potential, yet it’s worth remembering that the Prominent Hill ore body in particular is open at depth and along strike. There is clearly exploration upside at Prominent Hill.

It’s fair to say, however, that the new OZ Minerals will most likely trade at a discount to our spot valuation until there is board and management change. The new OZ Minerals (which should change its name back to Oxiana and rid itself of the Pasminco curse forever) is highly interesting, financially strong, predominately Australian-based play on copper and gold prices. It actually becomes a clear corporate target also in its new form.

With a market cap of $1.6 billion and an enterprise value of just $1 billion, the new OZ Minerals is worth accumulating from the current wave of forced arbitrage sellers. In a better resource market the stock could easily command a premium to our valuation and it isn’t hard to envisage scenarios where the stock trades over $1. At the moment it is both a trading and fundamental buy under 60¢.


BHP: it’s an asset buyer’s market

BHP's "growth strategy' is to "own long-life, low-cost, export-orientated, expandable assets".
The words "long-life, low-cost and expandable" rule out about 90% of the world's resource assets. BHP is only ever interested in absolutely tier-one assets that produce cash flow throughout the commodity cycle.

The question now facing the BHP board is whether is now cheaper to buy existing tier-one production at the bottom the cycle from a disbelieving equity market or embark or greenfields or brownfields expansions – the simple question of whether it's cheaper to buy than build.

This is once-in-a-lifetime stuff for BHP and I think it will utilise its huge strategic advantage and choose to buy existing production. Considering the premium rating of BHP shares, that is clearly the cheaper option.

The great advantage is that the shareholders of all potential BHP acquisition targets would readily accept BHP scrip. BHP scrip is a form of liquid cash and shareholders in beaten-up targets would be very thankful to be offered it. Just about the entire global resource market is for sale at a price right now and BHP is just about the only qualified buyer. While everyone hopes Rio Tinto is back in the cross-hairs, I think it may be something completely out of left-field.

One possibility is Alcoa, the Aluminium Company of America. It has been the best performing stock in the Dow Jones Industrial Average this month. On March 19 Alcoa placed 150 million new shares at $US5.25 alongside a $US500 million convertible note due in 2014. Since then 808 million of Alcoa's 980 million shares on issue have changed hands. Even if you assume some of that was hedging of the convertible note by shorting equity, it's fair to assume someone is building a stake in Alcoa. The volume is just too large to be explained by any other traditional buyer.

About three years ago I wrote that BHP would not buy Alcoa. At the time rumours were rife about BHP paying around $US50 billion for Alcoa. BHP then moved on Rio Tinto. However, today Alcoa's market capitalisation is just $US7.5 billion and the assets appear grossly cheap versus any replacement value or mid cycle earnings valuations.

Alcoa today at $US8 has about $US10 billion of debt and an equity market value of $US7.5 billion, generating an enterprise value of about $US17.5 billion. Alcoa fits in all the BHP boxes in my view about tier-one assets as well as leading global market shares. Alcoa is number one in bauxite, alumina refining and smelting capacity, and number one or two in downstream production, which BHP would more than likely spin back out during better economic times.

Rio paid about $US44 billion for Alcan and has similar production of global primary aluminium to Alcoa of around 4 mpta (million tonnes per annum). That's before you even talk about their bauxite and alumina businesses.

I realise all the market speculation right now is about BHP re-bidding for Rio or parts of Rio. However, I find it highly interesting that there has been a huge volume spike in Alcoa shares and BHP has raised fresh debt capital that is almost identical in scale to Alcoa's debt position. Any Alcoa acquisition wouldn't prevent BHP from making other tier-one acquisitions, but it is hard to find a target with more tier-one assets and number-one market shares than Alcoa right now.

I'd be buying Alcoa shares at today's prices. For those who can't buy Alcoa shares, ASX listed AWC down here will prove a highly geared trading derivative. Clearly hedge funds have also worked out that BHP is cum what is most likely a scrip-based acquisition and have started shorting BHP shares and buying likely targets. In the very short term that will most likely prove a rewarding trading strategy.