takeover talks keep oxiana buoyed, page-14

Melbourne Sun Herald
May 14, 2008

Zinifex in profit alert
Felicity Williams


ZINIFEX has warned that earnings will be lower than expected for the six months to June 30, dragged down by sagging zinc prices and rising costs.

The profit downgrade adds further uncertainty to Zinifex's planned $12 billion merger with Oxiana, amid concerns about the tie-up among some Oxiana shareholders and market speculation that a cashed-up counter-bidder will spoil the deal.

Zinifex chief executive Andrew Michelmore said yesterday that the miner would deliver lower-than-expected earnings in the second half of 2007-08.

In an address at a mining conference in Florida, Mr Michelmore said substantially lower zinc prices and the rising cost of energy, labour and other commodities would more than offset higher zinc and lead sales.

His comments highlight the underperformance of Zinifex's major metals - zinc and lead - compared with those of Oxiana - copper and gold - in recent months.

And they come just one month after concerned Oxiana shareholders raised the issue of their company's strong growth pipeline relative to its would-be merger partner at the Oxiana annual meeting.

Ord Minnett analyst Peter Strachan said Oxiana might choose to re-negotiate the terms of the deal - 3.1931 Oxiana shares for each Zinifex share - after the downgrade but added that the long-term logic of the merger remained sound.

"If Oxiana was not happy with merger terms, they have the option of bursting the bag and saying no," he told BusinessDaily.

"That said, the mining industry always has short-term fluctuations in metal prices."

After the downgrade Zinifex shares ended 10 lower yesterday at $10.32, while Oxiana lost 2 to $3.52.

Ord Minnett analyst Peter Arden said investors were holding on to both stocks, amid speculation that a big international player could come over the top with a counter-bid for either party.

"The general view is that the resources sector is in pretty good shape overall, and there might be someone else wanting to come in and offer a sweeter deal," he said.

Market speculation about possible counter bids has so far centred on an offer for Oxiana by Xstrata, now that the Anglo-Swiss miner's merger talks with Brazilian rival Vale have fallen through.

Other potentially interested parties include Canada-based Teck Cominco, British-based Anglo American and US-based Freeport McMoran, as well as Chinese and Russian interests.

Last year zinc tumbled off its record $US4600 a tonne on the London Metal Exchange and is now around $US2200 a tonne.

Zinifex reported a $1.039 billion net profit in the first half of 2007-08, buoyed by the spin-off of its smelting assets. Profits from continuing operations totalled $228 million during the period.

Zinifex shareholders will vote on the proposed merger on June 16.